On Tuesday the House Financial Services Committee approved a request by the Federal Housing Administration (FHA) to raise the ceiling on annual FHA mortgage insurance premiums from its current level of 0.55 percent.

FHA had requested the increase as one part of a plan aimed at shoring up its capital reserves which have dropped below the 2 percent required by law.  The agency already raised the up-front premium charged to borrowers closing effective April 9.  If the full Congress approves the annual increase, FHA will then shift some of the upfront premium to an annual premium to reduce the burden on borrowers at closing.

FHA says it intends to gradually raise the annual premium to 1.5 percent. 

FHA revealed late last year that its current reserves are at .53 percent, but officials have said that their tightened lending requirements as well as the increase in premiums would allow them to restore the levels by collecting an additional $5.8 billion over the next few years.  The Congressional Budget Office has put the number at a much more conservative $1.9 billion.

While approving the increase, the Committee defeated a proposal sponsored by Scott Garrett (R-NJ) which would have increased the minimum down payment for FHA guaranteed loans from 3.5 percent to 5 percent.  It also would have prohibited sellers from participating in the buyer’s closing costs and prohibited the inclusion of any initial services charges such as appraisal, inspections, and other fees in the principal amount of an FHA mortgage loan.  The FHA has already reduced the amount that a seller can contribute to the buyer’s closing costs from 6 percent of the loan amount to 3 percent.  Garrett has also submitted separate legislation which would prohibit the buyer from rolling the upfront premium into the loan which would effectively increase the cash required of the borrower at closing.

Had the Garrett Amendment survived the Committee vote it could have had a considerable negative effect on the housing market.  FHA guaranteed loans have historically been a minor factor in mortgage financing, but in the last few years, as credit tightened, the FHA was forced to increase its funding efforts up to 25 percent of all mortgage loans and an even high proportion of loans to first time home buyers.

T’was the week before Christmas
When all through the lands,
LO’s and Closers were wringing their hands.
RESPA changes are coming,
They all started to worry,
We’d better get trained, and get trained in a hurry!
We all kept on hoping
There would be a delay.
But HUD said, “No Way,” it’s all here to stay.
“We love our new HUD
And our new GFE,
Don’t fret, don’t worry, it’s as simple as can be.”
We all shook our heads,
Threw our hands to the sky.
What were you smoking? You must have been high!
You took a one page doc
And changed it to three.
Easier? More simple? How can that be?
The Regs don’t match up,
So now what do we do?
HUD says, “No comment, It’s all up to you.”
No info on TILA,
HMDA, REG B.
We are totally screwed, why can’t they see??
In a time when some borrowers
Think lenders are scary,
You’ve given 3 pages to make them more wary.
This doesn’t make sense,
Not one little bit.
We are all trying hard to not throw a fit.
So we will all do our best
To put borrowers at ease.
But make more reform, please, please, please!
Please bring someone in
Who knows just what to do.
What is best for both borrowers AND lenders too.
We are all still waiting,
Though not holding our breath
And hoping the government doesn’t “Reg” us to death.
So, on this week before Christmas,
I’d like to wish you
Good luck with RESPA, I need it too!

Most U.S. cities saw gains in the median price of single-family homes sold during the third quarter, the national median home price was $177,900, up $7,000 from the second quarter.  It was the second quarter of consecutive gains.  Nearly half of home sales are now being made by first-time purchasers, much of the gains are being attributed to the first time homebuyers tax credit.  Critics of the tax credit call it a poorly targeted method of boosting sales. Since all first-timers get the credit, whether it persuaded them to buy or not, that would mean about $40,000 was spent by the government for every extra sale.  Most sales have been of existing homes.  New homes sales, as well as new home construction, have remained stagnant.  If the Federal Reserve stops it’s purchase program of mortgage-backed securities the low mortgage rates we see now could go up quite a bit.  It was reported that housing starts fell more than 10% to an annual rate of $529,000 in October, the lowest level in six months.  Home builders started construction of far fewer new homes in October than the month before, it was a big and unexpected drop for the downcast housing industry.  Building permits also fell in October, part of the reason for lack of building is high foreclosure rates.  Only a tiny percentage of troubled homeowners have received permanent modifications under president’s Obama’s foreclosure prevention plan.  Under the plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and submit the appropriate paperwork.  If they qualify for a long-term modification, borrowers can keep making the lower payments for five years, after which the interest rate is et at the time of that adjustment.  Some 650,000 homeowners have been put into trial modifications, a long way off from the announced 4 million the program was supposed to help.

Foreclosures hit a record high in the third quarter despite all the supposed government efforts to help prevent them.  The 937,840 homes that received a foreclosure letter in the third quarter was the worst three months on record, or one in every 136 U.S. homes were in foreclosure.  Once again the efforts put forth by this administrative despite many changes to improve the results have failed.  Servicers say that they are wrestling with getting the completed documents they need to put borrowers in permanent  modifications.  If trail modifications don’t convert to permanent modifications, then the program won’t be considered a success.  Initial construction of U.S. homes rose far less than predicted in September,  they were only up .05% for September.  Uncertainty about a possible extension and expansion of the $8,000 tax credit for first-time homebuyers are making builders nervous about the near-term outlook.  Applications for building permits, which are a gauge of future construction activity, also missed predictions.   Home values are predicted to drop in 342 out of 381 markets during the next year, the median home price is predicted to drop11.3% by June 30, 2010.  The Case-Shiller Home Price index has been stabilizing in recent months, this may be a temporary reprieve.

· SEPTEMBER 4, 2009

Loan Losses Spark Concern Over FHA

By NICK TIMIRAOS and DEBORAH SOLOMON

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

The rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, come as the agency has rapidly increased its role in guaranteeing loans in an attempt to stabilize the housing market.

It isn’t clear how the rising losses may affect home buyers. Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency. Agency officials say if there is a shortfall, they don’t have to do anything except report it to lawmakers. But some mortgage and housing analysts see trouble ahead. "They’re probably going to need a bailout at some point because they’re making loans in a riskier environment," says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. "…I’ve never seen an entity successfully outrun a situation like this."

The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can’t make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

Rising defaults have eaten through the FHA’s cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.

Resulting FHA losses are offset by premiums paid by borrowers. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.

If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market. Some housing analysts have said losses might lead the FHA to pull back lending, which has helped boost flagging housing demand.

A senior official at HUD, which oversees the FHA, said there is "no risk" that the FHA would require money from Congress if the ratio falls below 2%. Asked about the agency’s capital ratio, the official said a report detailing that number won’t be completed until the FHA’s fiscal year ends Sept. 30.

HUD Secretary Shaun Donovan said in June, "there’s a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we’ll more than likely to stay out of a broader need for any taxpayer funding."

Some economists say the FHA’s lending has been crucial to preventing a deeper bust in property. Thomas Lawler, an independent housing economist, said "the alternative could have been a complete meltdown of housing finance" that would have ultimately led to much larger losses. Critics have said the FHA, which has never had a chief risk officer, isn’t able to manage such a large portfolio in an unstable market.

Policymakers have used the FHA to stabilize the housing market by pushing it to offer credit with far easier terms than that offered by most private lenders. For example, it will back loans with down payments as low as 3.5%.

Much of the FHA’s risk comes from its growing exposure to the broader economic downturn. The FHA is particularly sensitive to home-price declines because of the small down payments it will accept, which can quickly become wiped out by a fall in home values.

"The size of their footprint in the mortgage market is so large that it exposes the FHA to economic risk, even if the products are performing well," says Howard Glaser, a mortgage consultant and former HUD official.

A review conducted this year by mortgage consultants Ann Schnare and Michael Goldberg found the estimated value of the FHA’s reserve could have a shortfall below the mandated 2% minimum of $3 billion during the fiscal year ending Sept. 30, and $4 billion for the coming year.

The FHA’s total assets have increased to around $31 billion, up from $27 billion one year ago. The pending review, however, accounts for projected losses over 30 years. That put the estimated economic value of the fund at $12.9 billion last year, or around 3% of all FHA-backed loans.

Before the boom, the FHA wasn’t a big player in the housing business because it didn’t follow private lenders in loosening its standards. Borrowers had to fully document incomes and insured loans were capped at $362,000. Congress increased those limits last year to as high as $729,750 in the most expensive markets. In August, the FHA and the U.S. Department of Veterans Affairs backed 40% of loans for all home sales.

Officials said as recently as May that they didn’t expect to fall below the 2% limit, but home-price declines have exceeded those used to model their expected losses. Given the pace of those declines, "there is no way they will make the 2%" if the current study follows last year’s methodology, says Mr. Lawler.

The FHA says it has seen loan quality improve in recent months, including an increase in average credit scores and a decline in loans that were one month delinquent. The agency expects to make $1.4 billion on loans it will insure for the fiscal year that begins in October.

Last year, the agency ended a program that allowed sellers to fund down payments. While that program accounts for around 11% of the FHA’s loan book, it has generated 22% all loans that are seriously delinquent or in foreclosure.

In 2005, the FHA loosened its maximum loan-to-value limit on cash-out refinancing to 95%, from 85%. The agency moved that limit back to 85% earlier this year.

While most private lenders have raised lending standards and now require minimum 20% down payments, the share of borrowers who are able to make down payments of less than 10% hasn’t changed in the last two years, largely because of the FHA, says Mr. Pinto, the former credit officer at Fannie Mae.

Write to Nick Timiraos at nick.timiraos@wsj.com and Deborah Solomon at deborah.solomon@wsj.com

Printed in The Wall Street Journal, page A1

Saturday WSJ Article

Behind FHA Strains, a Push to Lift Housing

Worry Mounts That Federal Agency, a Mortgage Insurer, Will Need a Bailout as Its Cash Dwindles and Role in Market Grows

By NICK TIMIRAOS

As it tried to help shore up the ailing housing market during the past year, the Federal Housing Administration increased its exposure, particularly to mortgages in high-cost states that have also seen some of the sharpest price declines.

Now concerns are mounting that the agency — and the U.S. taxpayer — may have to pay the price.

The FHA insures loans secured with down payments as low as 3.5%. But values in many markets in which it has been increasing its activity have fallen far more than that in the past year. The result: A growing number of homeowners with FHA-backed loans owe more than their homes are worth and are more likely to default.

Officials worry that the resulting losses will help push the FHA’s reserves below the level required by Congress. The value of those reserves will be revealed in the agency’s annual review due Sept. 30. If they have fallen below the minimum, that could prompt a new round of questions about the role government should play in stabilizing the housing market.

David Stevens, the FHA’s new commissioner, said on Friday that the agency will continue to support the housing market and isn’t in danger of needing a taxpayer bailout. But some housing analysts warn that, if home prices decline much further, the agency would require taxpayer assistance for the first time in its 75-year history.

At the end of June, some 7.8% of FHA-backed loans were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, up from 5.4% a year ago.

The prospect of yet another taxpayer bailout has put under the spotlight an agency that largely sat out the housing boom. It was created to serve first-time buyers and others with spotty credit. But during the boom, the FHA’s rules on such matters as documenting income drove borrowers to lenders with looser standards.

As private lenders sharply curtailed credit when boom turned to bust, the FHA became one of the only places to turn for buyers who couldn’t afford big down payments or who wanted to refinance but had little home equity. The number of loans backed by the agency has soared, and its market share reached 23% in the second quarter, up from less than 3% in 2006, according to Inside Mortgage Finance.

The FHA’s growing role has been cheered by economists, the real-estate industry and members of Congress who felt that it prevented the housing collapse from being worse.

Even as the FHA tightened lending standards moderately last year, Congress allowed the agency to make much larger loans, up to $729,750 in the highest-cost markets. Previous loan limits, at $362,000, had kept the FHA out of more expensive markets, including some of the hardest hit during the housing bubble. In July, California accounted for 13% of the FHA’s mortgages, up from 1.5% in 2006.

Mounting losses have eaten into the FHA’s cash cushion. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.

FHA officials have refused to comment on whether the reserves would fall below the 2% level, but say that even if that happens, the agency is adequately capitalized.

The release of the annual review will be an early trial-by-fire for Mr. Stevens, a well-regarded housing-industry veteran who took the top FHA job in July. Mr. Stevens already has begun boosting oversight and reining in risk. Last month, he suspended Taylor, Bean & Whitaker Mortgage Corp., the third largest FHA lender, from making FHA-backed loans, sending a clear signal about the agency’s newly aggressive posture. Taylor Bean ceased operations and later filed for bankruptcy protection.

The agency is expected to announce measures this fall to improve oversight of its lenders and will name a chief risk officer, which it has never had.

Some housing analysts believe that deep losses could spur even tighter restrictions. "It absolutely changes the political dynamic once you have to ask taxpayers" for money, said Lisa Marquis Jackson, vice president at John Burns Real Estate Consulting in Irvine, Calif.

Last month, the consultancy wrote in a note that mounting losses could lead to an "imminent pullback" from the FHA, and the firm has been warning investor and home-builder clients: "Be prepared for this to happen in some way, shape or form."

Members of Congress have voiced concerns over the agency’s reserves. But many may balk at raising new hurdles for borrowers.

Brian

Interest: a fee charged for the use of money.

Index: a measurement used by lenders to determine changes to the interest rate charged on an adjustable rate mortgage.

Inflation: the number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation.  It results in a decrease in the dollar’s value.

Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.

Judgement: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor’s claim by providing a collateral source.

Loan- money borrowed that is usually repaid with interest.

Lien: a legal claim against property that must be satisfied when the property is sold.

Loan-to-Value (LTV) Ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.

Lease Purchase: assists low-to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

Loan Fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.

Lock-In: since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.

Loss Mitigation: a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.