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Will FHA Save the Mortgage Industry?

During the Great Depression, the National Housing Act of 1934 was passed, and the Federal Housing Administration (FHA) was formed. In 1965, the Department of Housing and Urban Development (HUD) was formed to execute the policy on housing and cities. FHA was then absorbed into HUD. Since 1934, the FHA has helped finance homes for veterans and their families, the handicapped, elderly, lower income families, and credit challenged individuals.

The demand for FHA loans diminished quite a bit when housing prices shot past higher than the FHA maximum loan limits and further diminished when subprime lenders popped up offering loans at low teaser rates that made the mortgage payments on these higher-priced homes more affordable by means of creative financing. But, borrowers were left holding the bag with skyrocketing mortgage payments when their loan rates reset. Then, foreclosures started happening at such a rapid rate that it's now reached epidemic proportions.

In response to the housing and foreclosure crisis, the Bush administration passed the Economic Stimulus Act. A large part of this Act consists of a foreclosure rescue plan, FHASecure, which allows borrowers of option ARMs to refinance into fixed-rate mortgage loans. This Act also temporarily rose the FHA (and conventional) lending limits to help service more borrowers.

On August 6, 2008, U.S. Department of Housing and Urban Development Secretary Steve Preston announced that 300,000 families have refinanced their mortgages with HUD’s affordable mortgage insurance program.

On October 1, 2008, a new program is going to be implemented under the Housing and Economic Recovery Act of 2008. The HOPE for Homeowners Act of 2008 will continue FHA’s existing and successful efforts to provide aid to struggling families trapped in mortgages they currently cannot afford. Other key measures under the Housing and Economic Recovery Act of 2008 including the FHA Modernization Act of 2008, Foreclosure Prevention Act of 2008 and FHA Manufactured Housing Loan Modernization Act of 2008 have modernized and streamlined FHA lending guidelines.

FHA doesn’t have enough provisions to save the mortgage industry. Here are a few reasons why:

• FHA regulations do not permit any new second liens to be added at closing, unless the second when combined with the first does not exceed FHA's maximum loan to value (LTV) requirements, to cover any shortfall from the difference between the existing loan balance, closing costs, etc and the maximum amount of the FHA loan based on a current appraisal. The maximum LTV ranges from 97.15% to 98.75% depending on the location of the property and the amount of the loan. So, if the balance of your loan doesn’t meet this requirement, you can’t refinance under FHASecure or HOPE for Homeowners.

• You pay two mortgage insurance premiums (MIPs)—one up front that can amount to up to 2.5% of the loan balance and a monthly premium.

• If you refinance your existing loan under the HOPE for Homeowners Act, you’ll have to agree to share any equity you have now and in the future with the FHA. If you sell your house or refinance to a different loan within a year, you have to surrender all the equity. This increments down 10% per year to the minimum of 50%, which means that for as long as you own your home, you have to share 50% of the equity with FHA if you refinance or sell.

While the FHA isn’t a perfect solution, it’s a step in the right direction. If you’re facing foreclosure, and you have at least 3% equity, refinancing under FHASecure (until December 31, 2008) and under the HOPE for Homeowners Act (starts October 1, 2008) is a lot better than losing your home to foreclosure. With conventional lenders tightening lending standard to where only those with very high credit scores can qualify, FHA is a viable option for purchase loans and mortgage refinancing. Plus, you only have to come up with 3.5% down for a FHA loan as opposed to at least 20% on a conventional loan. And you only have to have 3% equity to refinance through FHA. If you’re an existing FHA customer, you can always refinance through FHA Streamline, get better rates and save money.