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FHA Announces Policy Changes to Address Risk and Strengthen Finances

New Measures Will Help FHA Better Manage Risk,

While Costing New Home Buyers More.

WASHINGTON – Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation’s housing market recovery.

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens. “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”

Announced FHA Policy Changes:

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
• The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge. This is a $500 increase per $100,000 per loan amount. Whereas it used to cost $1,750 in UFMIP, now will cost the new home buyer $2,250.
• If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP. Depending on how high this goes it may kick some borrowers out from qualifying.
• This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing. They must get approval before this can happen.
• The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring. Buy your new home in the next 30-60 days if you are look at using an FHA loan for financing as it is about to get more expensive.
2. Update the combination of FICO scores and down payments for new borrowers.
• New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%. Although FHA is still at 580, most lenders are at 620 and several have made the recent move to 640.
• This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
• This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
3. Reduce allowable seller concessions from 6% to 3%
• The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions. USDA still allows 6% and Conforming allows it as well if the borrower is putting down 5% or more. This will basically eliminate sellers paying for borrowers pre-paid items (initial annual homeowners insurance payment, taxes and escrow account)
• This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

HUD is the nation's housing agency committed to sustaining homeownership; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development ad enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov

Gov. Jay Nixon and State Treasurer Clint Zweifel today joined skilled craftsmen in St. Louis and Kansas City to kick off the Home Ownership Purchase Enhancement (HOPE) Program, a $15 million initiative designed to jumpstart the state's housing-construction industry.

Under the HOPE program, the Missouri Housing Development Commission will provide incentives of up to $1,750 to encourage Missourians to purchase homes.  The incentive will equal the cost of the homebuyer's first year's property taxes, up to $1,250. 

In addition, Missourians also would be eligible for an enhanced incentive if they purchase an energy-efficient home, purchase and remodel an existing home, or purchase an item, such as an Energy Star appliance, to make the home more energy efficient.  If the homebuyer's estimated property tax would be $1,250, the energy efficiency enhancement would be $500.  If the homebuyer's property tax would be less than $1,250, the individual would be eligible for a larger energy-efficiency incentive, up to a total incentive of $1,750.

You can view the applications at www.mo.gov and click on the homebuyer incentive tab.

Who is eligible?

Income eligibility is based on previously adopted MHDC guidelines. Depending on the county of the home sale, household income limit guidelines for low to moderate income persons or families approved by MHDC last spring range from $58,300 to $98,560. These grants are for owner-occupied purchases only.

When would it start?

Missourians are eligible for the HOPE incentive for purchase contracts made on or after Jan. 1, 2010.  Funds are available on a first-come, first-served basis until the total pool of $15 million is exhausted.

Where is the funding for this program coming from?

The funding comes from a reserve fund held by MHDC earned through successful management of mortgage loans made to low- and medium-income individuals and families. These reserve funds are not from general revenue, nor subject to the legislature's appropriation process.

How much of the property tax bill could be paid?

Eligible homeowners could have up to $1,750 of their property tax bills paid. According to the State Tax Commission, the average residential real estate tax bill for a Missouri homeowner is $1,160. An income-qualified individual or family is eligible to receive $1,250 or the amount of their first year's real estate tax bill, whichever is highest, when they purchase a new or existing residential home. An income-qualified individual or family can enhance this base amount, up to $1,750, if they purchase an energy-efficient new home or make energy efficient improvements to an existing home that is purchased. These improvements must be made prior to closing or within 60 days of closing. 

How do Missourians apply for these funds?

Forms and affidavits will be part of documents executed at the home sale closing.  Additional receipts and documentation will be required for proof of energy efficient improvements.  The MHDC forms have been finalized and are now available online by visiting the state's Web site, www.mo.gov, and clicking on the homebuyer incentive tab.

What energy-efficiency upgrades are eligible for the additional incentive?

Eligible improvements include installing high-performance windows, house wraps, programmable thermostat controls, water-efficient toilets and faucets, and energy-efficient water heaters, lighting and appliances; sealing heating and air conditioning ductwork; caulking; insulating water heater pipes; increasing the R-value of insulation in crawl spaces and attics; and conducting on-site energy efficiency inspections and tests, including a blower door test, which tests the overall energy efficiency of the house, and a duct blaster test, which tests how much the air ductwork leaks.

90-Day Seasoning Waiver Expanded

This update from FHA was released on Friday January 15th, 2010, as an excerpt from the CFR (Code of Federal Regulations) without a corresponding Mortgagee Letter and contains information about FHA's policies regarding the waiver of the 90-day seasoning required for sellers.

Here are the 6 things you need to know about these changes:

1. Waiver takes effect February 1st, 2010 for a period of one year unless extended.
2. Investors are now exempt from the 90-day seasoning rule.
3. All transactions must me arms-length.
4. No identity of interest can exist between buyer and seller.
5. If sale price is 20% or more of the seller's acquisition cost, the lender must:
   a. provide supporting documentation and/or a second appraisal and
   b. order an inspection of the property and provide it to the buyer.
6. The waiver is limited to forward mortgages only.

To read the text of this waiver and specific details: http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf

You Can Refinance Up to 125% of Your Home's Value

Even if you owe up to 125% more on your mortgage than your home is worth, you may be able to refinance. For example, if your home is worth $200,000 but you owe more than that, qualifying homeowners can now refinance up to $250,000. 

According to First American Core Logic, more than 15.2 million homes had negative equity in June 2009. This represents nearly 33% of all mortgaged properties across the country. Where in the past, being upside down on your loan would have precluded your ability to seek relief, you now may have an opportunity.

The Making Home Affordable program was initially structured to accommodate homeowners with a new loan to 105% of their home's value. However, that amount has been increased to 125%. There are requirements to qualify including whether your loan is currently owned by either Fannie Mae or Freddie Mac. You can find out if your loan is held by either agency by visiting http://makinghomeaffordable.gov/loan_lookup.html.

Recent guidelines from Washington have forced a change to the way that loan originators will disclose closing costs for all homebuyers. The purpose of the new Good Faith Estimate is to level the playing field for borrowers comparing loans to be able to make apples to apples comparisons for loan scenarios.

In essence, HUD is working to bring all lenders up to the same standard of excellence in reporting closing costs that I have always adhered to, estimating realistic fees that a buyer should expect to pay at closing with no last minute surprises.

What are the important facts you should be aware of in having conversations with homebuyers? Below are some important points to know:

1. All fees paid to the lender/broker are to be consolidated in one line, including processing fees, origination fees, etc. These charges cannot change from the original estimate without a material change to the loan requested.
2. In the event fees are being charged to obtain a lower rate, these are to be broken out and itemized for the borrower's ease of comparison to other loan programs.
3. Estimates for fees from government recording charges and third party settlement providers we suggest are to be itemized and the lender is held to a tolerance of 10% for their accuracy. In the event the estimated charges exceed the amount listed by the allowable tolerance, the lender will be responsible for making up the difference.
4. Estimates for services that the buyer can shop for and do choose can change at settlement without the lender being held accountable. This can include title charges, homeowner's insurance, and initial deposits for an escrow account.

The Four Steps To Properly Setting Goals
From Ric Edelman's Inside Personal Finance

First, set a positive goal for yourself. "I will save to buy a home" is a positive goal, while "I will not spend money" is a negative goal. By focusing on the positive, you'll quit spending money because you'll be so focused on your goal that you won't notice you've stopped spending money.

Second, set a date for achieving your goal. A goal is not a goal until you set a date for it. So set a date for achieving your goal, and make sure your date is attainable. If it's not, you'll become discouraged and quit. But don't set a date so far away that achieving it is pointless. "I want to be debt free by the time I die" is a silly deadline, because you won't be able to enjoy the benefits of achieving that goal.

Third, write it down. Until you see your goal in front of you, it's not real. Tape your goal onto your bathroom mirror, your refrigerator door, your car's steering wheel, and your PC's monitor. Keep reminding yourself of your goal. One client of mine kept a picture of his dream house above his television. Another, who wanted to buy a Jaguar, bought a Matchbox version for five bucks and kept it in his pocket. His co-workers regularly saw him playing with it at his desk. (Today, he drives the real thing.)

And fourth, stay focused. Keep your goal in front of you. If your goal is to buy a home, tour model homes. Read House and Garden, Architectural Digest, and similar magazines. Design your own floor plan. By immersing yourself in your goal, you'll find it easy to stop spending money, because you won't regard it as "not spending." You'll regard it instead as "preparing to spend my money on something really special."

Focus on the benefits you'll derive by reaching your goal, not on the sacrifices you're enduring. If you can't perceive the benefits, you won't achieve your goal, and even if by some chance you do reach your goal, you won't sustain your victory.

Keep all this in mind as I show you the mechanics of getting out of debt, for if you simply follow the steps I outline for you, you won't do yourself any good. Oh sure, following my plan will get you out of debt – but it won't keep you out of debt. Only you can do that.

Set your goal, give yourself a deadline, write it down, and stay focused. You'll be amazed how far this will take you.

One result of the credit crunch and the economic recession has been the freezing or reduction of home equity lines of credit (HELOC) by banks. A HELOC is a form of revolving credit in which the borrower's home serves as collateral. And while this is not a surprising move by banks looking to be more conservative with their lending policies during tough times, many home owners counting on this credit will face some challenges if their HELOC is reduced or frozen.

To help you deal with these challenges, the US Treasury Department and the Federal Reserve each released some tips for homeowners in this situation. The following is a summary of these tips.

Read Everything to the Letter – Your HELOC lender must provide you with a written notice if it has frozen or reduced your HELOC no later than 3 business days after the freeze or reduction. Information about any other changes to your HELOC must be included as well, so read everything mailed to you from your lender.

Pick Up the Phone – Your lender has the right to freeze or reduce your HELOC, even if you have a good payment record. Some common reasons for the action are a decline in the value of your home, a negative change in your financial situation, or a negative change in your credit score. Contact your lender if you have questions or concerns about a freeze or reduction.

Communication is Key – The required notice to freeze or reduce your HELOC will likely contain specific reasons for the action. Find out the reason, and see if you can take any steps to reinstate your HELOC. The bank might not know about home improvements you made that might affect the value of your home. It might not be aware that you or your spouse got a new job, took a second job, or made some substantial investments that affect your finances. If your credit took a hit, investigate ways to improve your credit and communicate your efforts to your bank.

Don't Be Afraid to Ask – Your lender must reinstate your credit privileges when the conditions permitting the freeze or reduction no longer exist. You may need to request in writing to have your line of credit reinstated, so be sure to find out why your HELOC was frozen or reduced. Once your lender receives your written request, they must promptly investigate and determine whether your HELOC can be reinstated.

Be Prepared for Fees – There may be some fees involved to cover the costs for an appraisal and/or credit report when a bank considers your request for reinstating your HELOC. However, you cannot be charged a fee to reinstate your HELOC once the condition that caused the freeze or reduction no longer exists.

If you or someone you know has questions about HELOCs, credit repair, purchasing or refinancing a home, please don't hesitate to give us a call 417-889-9292.

Dates to Remember in January, or not?

Just in case you were curious, these are some of the holidays, birthdays and events in January*:

1- Bonza Bottler Day, New Year’s Day
6- Sherlock Holmes' Birthday
8- Bubble Bath Day, Clean Off Your Desk Day, Elvis’ Birthday
16- Psychiatric Technician’s Day
17- Golf Day
18- Martin Luther Jr.’s Birthday- (observed the third Monday in January, actually the fifteenth)
20- Penguin Awareness Day
21- National Hugging Day
23- Answer Your Cat’s Questions Day, National Pie Day, Compliment Day
25- Fun at Work Day, Healthy Weight Day, Robert Burns Day, School Nurses Day
26- Australia Day, Spouse’s Day
30- Inane Answering Machine Day

*This list highlights a few of the holidays and is not meant to be all-inclusive