8/14/2019 FHA Loans Grow in Popularity Even With Foreclosed Homes

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In FY 2008, a national subprime mortgage crisis not only threatened HUD’s goals of raising minority and low-income homeownership, but triggered a global financial crisis.The crises have led to record-level foreclosures and defaults, communities in decline, andan unstable housing market. Many homeowners that held subprime adjustable ratemortgages (ARMs) unexpectedly but inevitably faced interest rate shocks after their 

 periods of low fixed rates ended. As a result, mortgage default rates, which were at recordlows a few years ago, have increased sharply. In the second quarter of calendar 2008,4.58 percent of all mortgages were in default or foreclosure, up from 3.30 percent a year earlier. Among subprime ARM mortgagors, 26.96 percent were in default or foreclosurein the second quarter, compared with 12.46 percent a year earlier. Concentratedforeclosures have left many communities distressed as they exacerbate the declineof home prices and cause rising levels of abandoned or vacant properties. This has criticalimpacts on minorities and low-income households who committed to a major share of subprime mortgages.

The weakened housing market--along with uncertainty about risks associated with

subprime loans, mortgage-backed securities and their derivatives in the capital market --has led lenders to tighten mortgage credit. The most recent available data from the HomeMortgage Disclosure Act reporting show that 15.9 percent of mortgage applications weredenied in 2007, the same as in 2006, but up from 13.8 percent in 2005. Higher denialrates, in combination with stagnant or declining prices, have blocked many homeowners’intended strategies to refinance ARMs before their higher rates kicked in.

The Federal Housing Administration has improved its management practices and business processes to provide FHA insurance to more low-income households seeking to become homeowners or to secure homeownership for the future. FHA’s efforts tomodernize and streamline its business practices, and the recent FHA modernization bill,reflect HUD’s emphasis on improving products, reducing risk, and automating business processes. In FY 2008, FHA expanded both the use of the Technology Open To ApprovedLenders (TOTAL) scorecard and the eligibility standard for automated underwritingapproval. This will result in direct savings to homebuyers and will expedite loanorigination for thousands of households.

The capital ratio for the FHA Mutual Mortgage Insurance Fund remains above thestatutory minimum of 2 percent, even in the midst of the deepest housing recession of themodern era. That ratio was estimated by an independent actuarial study to be 3 percent atthe end of FY 2008. The ratio represents reserves over-and-above what will be necessaryto pay for expected insurance claims in the future. The capital ratio directly influencesFHA’s ability to continue to offer insurance coverage to mortgagors. It is vital in thecurrent market environment that FHA be a viable option for homebuyers and for homeowners who need to refinance out of costly subprime mortgages.

FHA’s share of mortgage originations rose from under 2 percent in early 2007 to 22 percent in July 2008. Early in FY 2008, HUD and the Department of Treasuryencouraged mortgage market participants to form the HOPE NOW Alliance, includingcounselors, servicers, investors, and other groups. The Alliance provides coordinatedoutreach to homeowners in distress to help them stay in their homes. HUD-funded

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counseling organizations play a central role, providing borrowers with in-depthcounseling about debt management, credit, and foreclosure prevention. The Allianceestimates that the efforts of the mortgage lending industry during the first threequarters of calendar 2008 had enabled approximately 1.6 million homeowners to avoidforeclosure.

HUD also introduced FHASecure at the end of FY 2007 in response to the growingforeclosure crisis. FHASecure is helping homeowners with subprime ARMs refinance toaffordable, fixedrate, FHA-insured loans. Since inception, FHA assisted almost 369,000homeowners through the FHASecure initiative as of September 30, 2008. FHA defaultrates have been very stable while those for Subprime ARMs have escalated. FHA’sseriously delinquent rate (defaults plus in-foreclosure) in the second quarter of FY 2008was 5.43 percent, compared with 18 percent for all subprime loans, and 27 percent for Subprime ARM loans. Additionally, FHA has significant program safeguards that reduceand contain the risk of foreclosure for borrowers who experience mortgage default.FHA also has taken substantial steps to reduce predatory lending among minority

households and neighborhoods. This includes denying FHA insurance for mortgages onhomes that have been “flipped” at inflated prices and deploying special monitors to pursue unscrupulous appraisers and lenders.

The Housing and Economic Recovery Act has enabled FHA to better assist in therefinance of at-risk mortgages by establishing a $300 billion HOPE for Homeowners program. Through the Program, FHA helps distressed homeowners avoid foreclosure byinsuring new, refinanced mortgages that have lower balances, fixed interest rates, and atleast 30-year terms. To balance risk to the HOPE Insurance Fund, loans must berestructured so that mortgage payments are no more than 31 percent of monthly income,with an exception to 38 percent if the borrower first demonstrates the willingness andability to make those higher payments. Also, all second mortgages must be canceled andall late fees and prepayment penalties must be waived. Mortgagees also must write downthe loan’s principal balance to 90 percent of the home’s appraised value. This saves themfrom potentially larger losses should they rather pursue foreclosure, while at the sametime creating a more stable situation for the homeowner.

The housing government-sponsored enterprises, Fannie Mae and Freddie Mac, were placed under conservatorship in September 2008, because they held inadequate reservesof capital relative to their probable risk from defaults. Through the HERA, Congresscreated the new Federal Housing Finance Agency, and transferred to it two key regulatoryroles for the enterprises -- the safety and soundness oversight role of the Office of FederalHousing Enterprise Oversight, as well as HUD’s role of regulating the enterprises’affordable housing mission. The conservatorship will allow the GSEs to remain liquidenough to inject needed capital to help steady the mortgage market. Ginnie Mae alsocontinues to guarantee mortgage-backed securities backed by federally insured or guaranteed loans. Ginnie Mae guaranteed $220.6 billion in securities during FY 2008, providing continued support for the secondary mortgage market while increasing marketshare. The twelve Federal Home Loan Banks, which also are government-sponsoredenterprises, likewise continue to provide large amounts of mortgage capital.

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 Nishika N. Jones became a licensed REALTOR in 2000 and has since assisted in the saleof hundreds of foreclosures and government owned properties. Nishika specializes inforeclosure training and real estate agent training that creates consistent income andendless referrals. It is the ultimate business model desired by real estate agents; to have a base salary that can be drawn from between closings while assisting those who are

interested in acquiring government foreclosed homes.

For additional information and a FREE copy of the Special Report on "How To Have AnOnline Bid Accepted Below The Already Reduced Asking Price" visithttp://www.teachernextdoorprogram.net

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