So you’re buying a home?
Rates are low, prices are holding steady on homes and you’re
hearing that it really is a good time to buy.
You’ve read all about the banks and the fines. You think that perhaps the real estate bust
is in the rear view mirror. So, you’re
out looking.
You’ve also heard that lenders have made getting a mortgage
harder than pulling your molar out of your mouth with a toothpick and much more
painful. And, that is true. There were (and are) many average people who
just don’t get that lying on a mortgage application can (and should) land them
in prison. Even though the application
says so in fine print (see Housewives of New Jersey – one count against Theresa
was mortgage fraud).
In a nutshell, this concerned the government because it
really is important to have people buy homes.
It’s important that we as a nation have a system to allow people who are
starting out to get into their first home.
And, that is why the FHA loan system was set up in the 1930’s. To allow for loans that should be easier to
get than the average loan at the average bank.
And, many lenders offer FHA loans for this very purpose.
But, HUD, who handles FHA loans, made it tough. They tightened credit, increased the down
payment, introduced and increased the minimum credit score and came out with
the maximum amount a lender can lend to a borrower. If these rules were broken HUD would, and
they did, slap lenders with serious fines.
And, HUD raised what is called the mortgage insurance premium. This is an insurance premium that you pay
once at the time of your closing and every month as part of your mortgage
payment. The insurance is an insurance
policy that pays the bank back if you don’t pay your mortgage and the bank
forecloses on your house.
Lenders became skittish and backed away from doing FHA loans
because HUD did not want to pay out the insurance policies to lenders. The reason was that HUD was getting hit with
so many foreclosures in the height of
the meltdown that their insurance fund was depleted and they had to
borrow money from the US Congress to replenish it. Not only that, HUD is required to keep a
minimum of 2% cash buffer in their fund and they have not been able to get
there since the melt down. This is a
violation of the rules. Rules that if
lenders violated, HUD would fine, cite and close them down.
None of this fell on deaf ears in Congress. HUD Secretary Castro wants to lower the
mortgage insurance to make it so that borrowers pay less in their mortgage
payment when getting a mortgage. This
is great news for borrowers, as it will open the doors to individuals to buy
homes. It is questionable for HUD
because by lowering the insurance they are reducing the amount of money that
they need to collect to get to that magic 2% number.
Castro met with the House financial Services Committee to
discuss lowering the Mortgage Insurance Premium (MIP) by 50 basis points. He was met with some serious backlash from
Congresspersons who are concerned about the financial well being of HUD.
FHA is not a mortgage.
FHA is an insurance program that insures bank that underwrites loans to
FHA underwriting standards against future defaults by the borrowers. Provided that the lender properly underwrote
the loan, HUD should pay the premium. The problem from the perspective of the banks
is that when HUD saw their pool of money reducing they backed away from their
mandate to back loans – and looked for anything that could get them off the
hook from paying the bank on the loan.
This was so concerning that JP Morgan Chase openly stated they were
backing away from FHA loans and Wells Fargo did the same. Some cite a 70% reduction of FHA loans in
volume on the books of those two lenders from previous years. This is concerning to HUD because it reduces
the premiums. Yet, lenders say this should be no surprise since HUD regulators
were aggressive in their stance toward lenders during the worst of times. Why would anyone believe HUD would stand by
them in future times of crisis?
So, lenders in an effort to protect them put “overlays” on
FHA loans That means that, for example, if FHA said the minimum credit score is
580 lenders would reject anyone with a score under 640 period. And, if the score say was between 640 and
720 lenders were charging points or requiring more assets be proven – in an
attempt to build their own reserve fund against buy backs that HUD themselves
may attempt to back off from, as they had in the past.
This policy has reduced the number of FHA early payment
defaults in and of itself. .
So the debate rages on.
We shall see what happens. Does
HUD reduce the mortgage premium? Do they
limit the program to only first time borrowers? What’s the right balance to take from the
heady days of 2007 to the constricted days of 2012 and 2013? Time will tell.
