FHA Lists 50 Counties With Highest Default Rates
Filed under: FHA, FHA Eligibility Requirements, FHA loan, FHA mortgage, HUD foreclosed homes, Mortgage Default
The rates of defaults and delinquencies on FHA mortgage loans continues to surge. The latest Monthly Report to the FHA Commissioner on FHA Business Activity reveals that almost 1 out of every 10 FHA mortgages is now classified as “seriously delinquent”. A seriously delinquent loan is defined as being 90 days or more past due, in bankruptcy or foreclosure.
As of December 31, 2011, the FHA insured a total of 7,415,002 mortgages of which 711,082 or 9.6% were seriously delinquent. The prior fiscal year showed a total of 598,140 mortgages seriously delinquent. The number of mortgage defaults from the previous year increased by a very substantial 18.9%.
The large increase in FHA defaults is a source of growing concern since the FHA’s insurance reserve fund to cover loan losses is virtually depleted. By law, the FHA is supposed to maintain a capital ratio of 2.0% but fund ratio is currently at only 0.12%.
Including the number of FHA loans that are past due by 30 days or more, almost 18% of all FHA loans are in some stage of delinquency. Critics of the FHA program point out that when almost 1 out of every 5 borrowers cannot pay back their FHA loan on time, the FHA underwriting guidelines need a fundamental overhaul.
The Monthly Report to the FHA Commissioner discloses the 50 Metropolitan Statistical Areas (MSA) with the highest rates of FHA defaults on single family homes. A MSA is defined by the government as “one or more adjacent counties or county equivalents that have at least one urban core area of at least 50,000 population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.”
The county taking first prize for the highest number of FHA defaults is Ocala, Florida, with an astronomical 21% of all FHA mortgages in serious default. Keep in mind that the default rates below only include “seriously delinquent” mortgages which are past due 90 days or more, in bankruptcy or foreclosure. Based on FHA statistics, at least another 10% of mortgages in these counties are delinquent by more than 30 days but less than 90 days.
Based on the huge default rate of FHA mortgages, it is important for borrowers to fully assess their financial capabilities before buying a home using FHA financing. Although the program has liberal guidelines to promote homeownership, the trauma of mortgage default can wind up putting many families in a worse position than if they had remained renters. Besides a ruined credit score and losing the downpayment, a foreclosure puts serious emotional stress on a family.
Before considering the purchase of a home, which is a major financial and emotional investment, an independent financial adviser should be consulted with to assess the overall situation. Please also see “A First Time Home Buyer Asks How Much Home Can I Afford?”
Streamline FHA Refinances To Become Easier To Qualify For
Filed under: Benefits of FHA Mortgage, FHA, FHA loan, FHA property, FHA Streamline refi
A borrower who currently has an FHA mortgage has a large advantage over a borrower with a non-FHA loan due to the FHA Streamline Refinance program.
Although few FHA borrowers may be aware of the Streamline Refinance option, it is something that every FHA borrower should look into, especially with the recent HUD announcement of easier qualification guidelines.
As part of the Obama administration housing initiative to help struggling homeowners, HUD has announced changes to the FHA Streamline Refinance program that will allow more homeowners to take advantage of the current all time lows in interest rates.
The Streamline Refinance program has always allowed FHA borrowers who are current on their mortgage to refinance without the expense, red tape and delays traditionally associated with a mortgage refinance. The reason that the FHA Streamline Refinance is simple for homeowners is based on the simplified FHA guidelines associated with the program.
The Streamline Refinance is done without additional underwriting and best of all, does not require an appraisal of the property. From a practical standpoint, this mean that an FHA borrower who owes more on the mortgage than the house is currently worth, does not have to worry about being turned down for insufficient equity.
Despite the huge benefits of the FHA Streamline Refinance program, many borrowers were unable to take advantage of it because the banks were worried about the risks involved. If a borrower defaulted on a streamline refinance, the FHA would penalize the lender’s “compare ratio” which is used to measure the quality of a lender’s underwriting procedures. Defaults on FHA streamline loans can cause a bank’s “compare ratio” to increase which could potentially lead to the lender having their FHA status revoked by HUD.
In a HUD announcement, acting assistant secretary Carol Galante addressed the concerns of lenders who are reluctant to approve FHA streamline loans.
However, it has become apparent that some of our lending partners are reluctant to offer this product widely because of concern about taking on the risk of a loan which they may not have underwritten and the potential adverse impact such a loan may have on their FHA Compare Ratio.
In order to expand the availability of this product for eligible borrowers, FHA will make changes to the way in which FHA Streamline Refinance loans are displayed in the Neighborhood Watch Early Warning System (Neighborhood Watch). Streamline Refinances will be removed from the public compare ratio in Neighborhood Watch, but lenders will still be able to view their own traditional compare ratio (with streamlines included).
HUD will issue guidance to lenders on this change to the streamline refinance program during the coming weeks. Hopefully, lenders will become much more willing to do FHA streamline refinances once HUD finalizes the rule changes.
The expansion of the streamline refinance program will offer huge benefits to any FHA borrower who currently has a high rate. With FHA rates below 4%, millions of homeowners with FHA mortgages will be able to reduce their monthly mortgage payments.
FHA Wins $1 Billion From Bank of America For Claims Related To Mortgage Fraud
Filed under: FHA, FHA Eligibility Requirements, FHA loan, FHA mortgage, Mortgage Default
The Department of Housing and Urban Development (HUD) announced a $1 billion dollar settlement relating to mortgage fraud by Bank of America against the Federal Housing Administration (FHA).
HUD, which had been investigating lending practices at Bank of America since 2009 said that Bank of America knowingly made FHA loans to unqualified home buyers. HUD also accused Bank of America of originating mortgage loans based on inflated appraisal values. As a result of Bank of America’s actions, the FHA lost hundreds of millions of dollars according to HUD.
Bank of America agreed to pay the FHA $500 million immediately to compensate for losses incurred by the FHA on loans originated by Bank of America and Countrywide Lending which was acquired by Bank of America in 2008. The other $500 million will be set aside into a fund to be used to modify the mortgages of borrowers allegedly harmed by Bank of America’s actions. Any unused money from the loan modification fund not used after three years will be turned over to the FHA.
Discussing the settlement terms, U.S. Attorney Lynch had this to say:
“We announce today the largest ever False Claims Act settlement relating to mortgage fraud. Through their underwriting and origination of tens of thousands of government-insured loans to unqualified borrowers, Countrywide Financial subsidiaries systematically abused the Federal Housing Administration and became some of the main players in this country’s financial crisis. We are committed to protecting the FHA’s ability to provide assistance to qualified low income and first-time home-buyers, and this settlement goes a long way toward that end. It also puts lenders on notice that they will face serious financial consequences for violating their obligations under the FHA’s programs.”
Lenders who deliberately chose to bend the FHA rules to approve unqualified applicants can do so quite easily based on the manner in which the FHA lending program is set up. The FHA does not directly underwrite, fund or approve FHA loans – the FHA only insures FHA mortgage loans approved by authorized lenders.
The authority to approve FHA loans is given to authorized lending institutions who become “direct endorsed FHA lenders”. The lending decision is made by underwriters who work for the bank and are supposed to follow FHA lending guidelines. Often times, however, as seen in this case, the underwriters do not strictly follow FHA lending guidelines and approve unqualified borrowers.
The FHA has already expelled hundreds of FHA endorsed lenders that recklessly disregarded FHA lending guidelines and often times engaged in outright mortgage fraud. The FHA did not discover the fraud until after the fact when the borrower defaulted, resulting in losses to the FHA.
Considering the huge fine leveled against Bank of America and the fact that many of the notoriously fraudulently FHA lenders have already been expelled from the FHA lending program, the level of FHA mortgage fraud should decline dramatically.
Will The FHA Need A Bailout? Congress Approves “FHA Emergency Solvency Act” As Loan Defaults Soar
Loan defaults at the FHA continue to soar according to the latest FHA Single-Family Outlook report issued by the FHA.
The latest statistics on the FHA loan portfolio show that almost 18% of all FHA insured mortgages are 30 days past due or more. The number of loans classified as seriously delinquent increased by 19% from last year.
According to the FHA, a seriously delinquent loan is either in foreclosure, bankruptcy or 90 days past due or more. Almost all loans that reach classification as seriously delinquent are never brought current and wind up as foreclosures. Nationally, the number of foreclosure inventories remain at record high levels and FHA defaults are greatly contributing to this situation.
Attempting to prevent a collapse and taxpayer bailout of the FHA, a House Financial Services committee approved the FHA Emergency Solvency Act”. The Act would attempt to keep the FHA solvent by requiring better internal accounting controls and disclosures by the FHA, establishing minimum mortgage insurance premiums, terminating FHA lending privileges of unscrupulous lenders and requiring that FHA lenders who commit mortgage fraud be required to reimburse the FHA for losses.
The House Financial Services subcommittee noted that “The FHA’s cash reserves are down to dangerous levels and taxpayers cannot afford another Fannie or Freddie style bailout”. The Emergency Act will give new powers to the secretary of HUD to reduce risky lending policies before the FHA faces collapse.
The FHA insurance reserve fund which covers losses on mortgage loans has been almost completely wiped out. Although the law requires the FHA to maintain a capital ratio of 2%, the fund currently has a ratio of only 0.12%.
Critics of the FHA have long argued that the standards for FHA loan approval are too lax. Besides allowing a borrower to purchase a home with only a 3.5% downpayment, the FHA guidelines allow borrowers with very high debt ratios to be approved. (See FHA First Time Homeowner Asks “How Much Home Can I Afford” for more on this topic).
The housing collapse has no doubt contributed to the number of defaults at the FHA but allowing unqualified borrowers to purchase homes that they cannot afford does not help anyone in the long run. It is time to review the FHA’s mission and underwriting guidelines to ensure that the future operations of the FHA remain sound.
A First Time FHA Home Buyer Asks “How Much Home Can I Afford?”
Filed under: Benefits of FHA Mortgage, FHA, FHA Eligibility Requirements, FHA loan, FHA mortgage
One of the first questions that a first time homebuyer seeking an FHA mortgage will ask is “How much home can I afford?”.
It is widely known that banks have tightened underwriting standards in order to prevent homebuyers from purchasing a home that they cannot afford and winding up in default. Although the prospect of owning a home for the first time is certainly appealing, if the payments are not manageable, in the long term, the first time home buyer is likely to suffer financially.
A common sense approach used by many first time homebuyers is to compare their current monthly rent payment to the projected monthly payment for principal, interest, mortgage insurance, home owners insurance and property taxes (PITI). Many potential homebuyers, perhaps spurred on by real estate agents eager to earn a commission, will compare rent to total PITI and come to the conclusion that they can easily handle the financial responsibilities of home ownership.
Before jumping to conclusions, however, a prospective first time buyer should consider two important factors related to home ownership.
- How much are the estimated annual costs of maintenance and repairs?
- How much in savings will I have left after closing for unexpected and/or emergency repairs?
Any prospective home owner who talks to a current home owner will shortly come to realize that a home, especially an older one, is often times a “money pit” with always seems to require some type of repair or maintenance. A major problem with a heating or cooling system, roof, electrical system, structural problem or leaky basement can represent a budget killing expense for many, especially if they have no savings.
A new forced air furnace can cost between $2,000 to $4,000, a new water heater $1,000 or higher and a new air conditioning system up to $10,000. Using a high rate credit card to pay for costly repairs will only put further pressure on a budget that may be stretched to begin with after buying a home.
Although the FHA does not normally require a buyer to have cash reserves after closing, this can represent a major risk for a new home buyer. If one of the unexpected emergency repairs cited above is required, most home owners without savings are going to be facing a major financial problem. In days gone by, it used to be common for a bank to require that a home owner have savings at closing of 3 to 6 months worth of mortgage payments in order to ensure that a home owner would not quickly run into financial problems if an emergency came up. Any first time homebuyer should realistically assess the following question – Would I be able to handle an emergency situation costing $5,000 or more without putting my home and credit rating in jeopardy?
The easiest manner in which to assess the ability to handle the numerous costs of home ownership is to keep a careful budget of all income and expenses that you currently have as a renter. If no money is being saved each month and the cost of the monthly mortgage payment is equal to or greater than the current rent payment, home ownership is very likely to be a challenging experience.
The government mortgage giant Ginnie Mae has a calculator called “Your Path To Homeownership” which tells a potential FHA borrower how much they can afford for a new home. It is a useful tool for first time homebuyers to begin the evaluation process to determine if they are financially ready to own a home.
How Much Home Can You Afford?
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Another very useful tool for first time homebuyers is the Ginnie Mae calculator that compares the advantages of owning vs. renting a home. The calculator takes into account how long you expect to remain in the home, the cost of your current rent, the purchase price and other important factors to assess the risk/benefits of homeownership. (For an assessment of credit score requirements, see Why FHA Borrowers With FICO Scores Below 620 Can’t Get Approved).
Buying vs. Renting – Use the calculator below to compare the advantages and considerations of owning vs. renting a home.
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