Federal Housing Administration

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Federal Housing Administration
Indiana Statewide Conference on Housing and
Community Economic Development September 19, 2007
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• FHA - Mission
• Stabilize real estate markets
• Provide liquidity
• Preserve and expand homeownership

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• FHA Is A Safer Loan
• No fads or creative products
• No teaser rates
• Credit based on borrowers ability to pay -
  not equity or home price appreciation
• Prepayment penalites not permitted
• Comprehensive loss mitigation

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• FHA Loans
• Foreclosure prevention (loss mitigation) programs
  must be considered by lenders before foreclosure
  procedures are initiated
• Interest rates and costs on FHA loans are often
  lower than those offered for comparable subprime
  and conforming conventional loans.

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• Consumer Protections
• Rules to prevent property flipping
• Incentives and enforcement of loss mitigation
  options that help borrowers avoid losing their
  homes
• Reduced lender fraud and abuse using tools such
  as credit watch, Neighborhood Watch, and
  appraisal reviews

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• FHA Loans
• Purchase or Refinance
• Up to 30 year term
• Fixed Rate
• Qualifying Ratios
• 31 / 43
• Credit Qualifying Assumable

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• FHA Loans
• 3 cash investment on purchase
• A portion of borrowers closing costs can be used
  to meet the 3 required cash investment
• Source of funds ca be gifts, secondary financing,
  premium pricing, etc.

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• Adjustable Rate Mortgages
• Qualify borrower based on note rate
• 1 year and 3 year hybrid
• Increase no more than 1 per year 5 during
  life of loan
• 5, 7, and 10 year hybrid
• Increase no more than 2 per year 6 during
  life of loan
• Taxed on improved land

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• FHA Appraisal Requirements
• Compatible with conventional/other loan
  requirements
• Use of the revised Uniform Residential Appraisal
  Forms
• Eliminated VC Sheets and Homebuyer Summary forms

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• The Siphon Effect
• The subprime market has attracted many
  historically FHA borrowers with
• Low or no doc loans
• Low initial monthly payments
• Interest only

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• Unprecedented Default Rates
• Of the 3,000,000 subprime ARM loans originated
  between 2004-2006
• 120,000 have already foreclosed
• 500,000 are in serious default
• The ultimate FC rate is likely to top 20

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• What is Driving Defaults?
• Payment resets resulting in up to 150 increase
  in monthly debt
• Borrowers who were never qualified to support the
  fully amortized debt
• Prepayment penalties that inhibit sale or
  refinance
• Securitizations that prohibit modification or
  other workouts

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• Does FHA Perform Better?Mortgage Bankers
  Association National Delinquency Survey December
  2006

• Subprime
• 7.78 Seriously Delinquent
• 4.53 Foreclosure Rate

• FHA
• 5.78 Seriously Delinquent
• 2.19 Foreclosure Rate

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Indiana FHA Statistics
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• FHA Loss Mitigation
• Focus on home retention
• Mandatory all delinquent borrowers must be
  considered
• Servicer delegated
• Combination of incentives and aggressive
  monitoring ensure compliance

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Loss Mitigation Results
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• Conventional-to-FHA Refinance
• Provide an alternative to foreclosure for
  borrowers who can no longer qualify for
  conventional financing
• Break cycle of foreclosure and price depreciation
• Provide lenders another loss mitigation option
• Assist nearly 100,000 borrowers this year
• Assist nearly 160,00 borrower next year

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Conventional to FHA Refis

• 2005 33,937
• 2006 71,988
• 2007 93,000
• Annualized based on first four months of 2007
  volume

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• Obstacles
• Loan must be current
• Insufficient cash to pay prepayment penalties
• Primary and subordinate liens cannot exceed 97
  LTV (except for government DAP programs)
• Payment still too high for many borrowers

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• FHA - Policy Changes
• Subordinated second liens Applies to all FHA
  Refinances
• Refinance delinquent loans - FHASecure

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• FHA - Refinance for Upside-Down Borrowers
• Subordinated liens
• Short pay-off on existing mortgage
• Re-subordination of existing 2nds
• State local programs

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• FHA - Subordinate liens

• Second lien - CLTV may exceed the FHA LTV
  limit
• Qualifying ratios include second liens, unless
  payments are deferred more than 36 months

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• FHASecure - Purpose
• Extends FHA refinance option to borrowers who
  are
• Delinquent
• Non- FHA ARM mortgagors
• Facing Interest rate resets
• Helps borrowers stay in their homes and preserves
  communities
• Assists nearly 80,000 additional borrowers

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• FHASecure - Eligibility
• Effective immediately through December 31, 2008
• Non FHA-ARM that has reset
• Delinquency resulted from reset
• Six months on-time payments prior to reset
• Demonstrated capacity to repay
• SF owner-occupied, principal residence

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• FHASecure - Mortgage Amount
• Current FHA geographical maximum mortgage limits
  apply
• Current FHA maximum loan-to-value limits apply
• May cover existing first lien, purchase money
  second, closing costs, prepaid expenses, points,
  late charges, arrearages, and other costs

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• FHASecure - Lender Responsibilities
• Encourage borrowers to seek advice on tax
  consequences of debt write-off
• Ensure accurate property valuations in declining
  markets
• Refrain from soliciting homeowners to cease
  making mortgage payments in order to qualify for
  FHASecure

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• Risk-Based Premiums - Purpose
• Reach additional borrowers not reached today
• Reduce cost of mortgage acquisition to borrowers
• Reward borrowers for good credit practices
• Manage FHA funds in financially sound manner

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• Risk-Based Premiums - Benefits
• Fairer assessment of premiums for borrowers
• More Accept loans
• Clearer FHA underwriting guidance for lenders

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• Risk-Based Premiums - Features
• Purchase loans and fully-underwritten refinance
  loans after January 1, 2008
• LTV and credit score
• First-time homeowner who otherwise would pay 225
  bps premium may be eligible for a 200 bps premium
  - homebuyer pre-purchase counseling prior to the
  sales contract

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Risk-Based Premiums - Matrix
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• Risk-Based Premiums - Decision Credit Scores
• One Borrower
• Three scores use middle value
• Two scores use lower value
• Two or More Borrowers
• Determine each borrowers score
• Average the scores

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• Risk-Based Premiums Downpayment
• gt3 downpayment- traditional market equity
  investment calculation
• 3 or less downpayment- standard FHA calculation
• gt3 lt5 downpayment-Use 3 premium pricing
  category

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• Risk-Based Premiums Source of Funds
• Borrower and/or relative for 3 and above premium
  pricing categories
• Other sources of funds (e.g. non-profit and
  government agency) cannot be used to qualify for
  3 and above premium pricing categories
• Borrower and other sources of funds cannot be
  combined to qualify for a lower premium pricing
  category.

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• Risk-Based Premiums Borrower Eligibility
• Minimum credit score of 620 if downpayment funds
  from sources other than borrower or relative
• Minimum downpayment of 5 if no credit score for
  borrower

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• Risk-Based Premiums - TOTAL Scorecard
• TOTAL Underwriting
• All borrowers with valid credit scores must be
  scored by TOTAL
• Accepts will increase approximately 10 or more
• Manual Underwriting
• Refers are charged rate on the premium matrix
  where they fit
• DE underwriter decides if borrower qualifies for
  mortgage

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• Risk-Based Premiums Streamline Refinance
• Case number assignment before January1, 2008
• Upfront premium of 100 basis points, annual
  premium of 50 basis points
• Case number assignment after January1, 2008
• Risk-based premium based on the loans original
  premium bucket

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• Risk-Based Premiums - Annual Premiums
• 55 basis points Loans with 3 down payments
• 50 basis points Loans with 5 and 10 down
  payments

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• Supporting Materials
• Federal Housing Administration Website
  http//www.fha.gov/
• FHASecure Mortgagee Letter 2007-11
  http//www.fha.gov/reference/ml2007/07-11ml.doc
• FHASecure Qs and As http//www.fha.gov/