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FHA loans and their changes: Did the Government finally get it right?

Well, in a word probably not. But like the saying goes, Beauty is in the Eye of the Beholder. So what exactly have they done to make FHA more attractive? We’ll probably need to start with some good old “background” and context. Over the last 10 yrs. (that’s like back in the dinosaur age considering how fast the mortgage industry Evolves…. Or Devolves) we have seen FHA do all kinds of tweaks that were essentially their efforts to continue riding the WAVE of mortgage change.

15 years ago we had this neat FHA product call “Seller Funded down payment assistance”. Often labeled by the two prominent entities that did this… Ameridream and Nehemiah. The premise was simple. Have the seller raise the price of the house up by 3%, and then have the builder or seller “DONATE” that 3% plus a small fee to a wonderful charitable entity (Think organized crime and laundering money). So this nice CHARITY (Ameridream, Nehemiah, et al..) would accept the donation from the seller, minus a small fee then RE-GIFT the 3% back to the borrower like an ugly sweater at Christmas. What on earth could POSSIBLY be wrong with that picture? Nothing could go wrong, right? YEAH RIGHT!!!! So we have an over-inflated sales price and a borrower with no down payment. There couldn’t possibly be any danger there. Well so, ummm… you know…. FHA kind of realized that might not be such a great idea. Good thing they caught so soon and only did this practice for nearly a decade!!!.

fha-mip-refund

 

Well it came back to bite them. Once the “bad loans” began defaulting, HUD struggled to remain SOLVENT and keep their REQUIRED reserves ratios high enough. So they began to whittle away at some of the very things that made FHA loans palatable to consumers. First they stopped allowing partial rebates of the UP FRONT FEE they charge on every loan. For decades, when a consumer paid the UFMIP, they had a 7 yr. cycle, prorated, that would give the consumer the funds back if they paid off the loan early. But that seemed to be “low hanging fruit” and quickly HUD changed course and stopped issuing refunds on the UP Front fees they charged, which now stands at 1.75% of the loan amount. And they Lowered the prorate period on Streamline Refinances from 7 to 3 yrs.

It gets better (Or worse depending on whose side you’re on). The monthly MI had remained steady at a reasonable premium factor of .5% of the loan amt (Loan amount X .5 divided by 12). Well that piddly .5 was not near enough to keep HUD and FHA solvent. Once again, who could have EVER anticipated those super-duper great loans with no borrower investment would default? How could they know that inflated sales prices and “laundered”, I mean, “GIFTED” down payments would be an issue.

So FHA raised the Monthly MI from the .5 up to a final resting place of 1.3. Yep, do the math… that’s BIG. HUD and FHA were just sitting back and waiting for all those monthly MI checks to roll in and the Capital to keep them Solvent was ON THE WAY. Oh, but there’s more. You see… most loans that require monthly MI have a feature that allows the consumer to eliminate that portion of their monthly payment once they reach a certain equity position. Usually either 78 or 80% of the original value. But those loans that have more equity in them, well shucks, those are the best ones. They have the absolute least chance of default. So how could HUD possibly let the consumer out of the Monthly MI just when the “revenue was getting good”. So once again with a swoosh of a pen, Monthly MI on all FHA loans would NEVER, EVER stop.

So… here we are, circa 2014, and what might you expect has happened. You see, HUD likely forgot one interesting piece to the Solvency puzzle… you actually have to DO FHA loans to receive those checks from the consumer. And they desperately need a good mix of consumers who simply need an opportunity to become homeowners, even though they may have some issues that make the loans a little more risky and an equal amount of really good borrowers who will be very low risks of default.

And guess what happened… I know I know it shocked me too: The borrowers who could possibly qualify for a conventional, non FHA loan, well that’s what they did. After all, those Fannie and Freddie loans don’t require huge UFMIP’s and the PMI (monthly MI) is but a fraction of the FHA premium. So, apparently as a total shock to NO ONE except HUD, the only loans coming in were from people who simply had no choice but to use FHA financing.

FHA image

And then we get to late 2014 and early 2015. I know this reads like a spy thriller, but you’ll never guess what has happened. Again, I can see how No one could possibly have foreseen this, but HUD has so benevolently decided to LOWER the Monthly MI DOWN from the 1.35 factor of 2013 and 2014 ALL the way DOWN to a super low number of .8. The generosity is simply overflowing. So what does this mean to you? Well I’ll stop being sarcastic and help explain this better.

Starting January 26, 2015  (read the HUD news release)the new factor is .8. The UFMIP remains 1.75% and the monthly MI STILL remains in force for the life of your FHA loan. No matter what the Value and equity is. While this is a great start, it still leaves most consumers looking elsewhere and ending up in FHA financing as a last resort. After all, you must put 5% down if you want a traditional, conventional loan. So if you simply can’t muster the 5%, the FHA and their 3.5% down payment is an alternative for you. Make no MISTAKE, there are times and situations where the FHA option is the best option, and there are times when it is the only option. Our goal, is to know when that is the case and use FHA for those situations.

As a consumer and potential home buyer, ASK LOTS of questions early and often. There are many neat loan options and you may be surprised at what’s out there.  Why not give us a call and find out more.  We would love to hear from you.

 

David Tyndall is President of Mortgage Choice Inc.  He has been in the Triangle, North Carolina mortgage market since 1990 and has helped nearly 10,000 people with qualified, mortgage counseling and advice.  Feel free to contact David HERE.New David PICTURE                                                                                                                                                                                                                                                                                                                                      mortgage_choice_logo

 

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