Residential Mortgage Lending: Principles and Practices, 6e

© 2012 Cengage Learning

© 2012 Cengage Learning© 2012 Cengage Learning

Residential Mortgage Lending:Principles and Practices, 6e

Chapter 8 Government Lending


Objectives• After completing this chapter, you should be able to:

– State the major functions of Federal Government mortgage insurance and guarantee programs.

– Explain how the FHA mortgage insurance program stimulated lending activity among life insurance and mortgage companies.

– List three reasons why use of FHA insurance declined in the 1970s.– Understand the basic guidelines of FHA and VA loans.– Compare and contrast the basic provisions of FHA insurance, VA

guarantee, and USDA guarantee programs.– Explain how FHA, VA, and RHS programs have changed in the last ten

years and why.


The Practice of Government Lending – Who is the Lender?


Government Programs• Federal Housing Authority (FHA)• VA-Guaranteed Loans• Rural Housing Services (RHS)


FHA Insurance• The FHA insurance premium is comprised of

two components: • an upfront premium paid at closing • and an annual premium.


● Section 203(b) Insured Mortgage● Section 203(k) Rehabilitation Mortgage● Title I Home Improvements● Energy Efficient Mortgage● Section 255 Home Equity Conversion● Section 248 Indian Reservations and Other Lands● Section 203(h) Insured Mortgage for Disaster Victims

FHA Today


FHA Loan Limits• Mortgage maximums single family $271,050


Qualifying Ratios

• FHA’s ratios of 31% for housing debt/income

• and 43% for total debt/income


VA Guarantee• The VA guarantee authorizes the Veteran’s

Administration to reimburse the lender for a percentage of its loss after foreclosure on a VA loan. Without it, lenders would be prohibited by their regulators from providing credit under such favorable terms to the borrower.

• Regular refinance transactions are limited to an entitlement of $36,000, or $144,000 loan amount.



Eligibility● Current or former armed service personnel● Active duty personnel● National Guard reservists● Unremarried surviving spouses of veterans

whose deaths were caused by a service-related injury or ailment

● Spouses of members of the armed services who have either been missing in action or prisoner of war for more than 90 days


VA Down Payment

• The program was designed to allow veterans to buy homes with no money down.


What Do You Think?• Discuss the positive and negative ways in which government-sponsored mortgage

programs impact housing.• How is mortgage insurance (FHA or PMI) different from a mortgage guarantee (VA

or USDA)?• Why has FHA mortgage lending increased so dramatically in recent years? • Explain how FHA mortgage programs differ from conventional mortgage programs.


What Do You Think?• How do VA guarantee programs work? • What program eligibility issues and

restrictions does the VA impose? • What eligibility issues and restrictions do

USDA RHS programs have?


Check Your Understanding1. Mortgage insurance reduces risk and increases the

liquidity of a mortgage investment. 2. Mortgage insurance encourages lenders to make more

loans with low down payments. 3. Mortgage guaranty companies were heavily regulated in

the1920s and 30s. 4. Most mortgage guaranty companies had adequate

reserves to withstand the Depression years. 5. Careless underwriting and appraisal procedures

contributed to the failure of mortgage guaranty companies in the 1920s.


Check Your Understanding6. FHA-insured mortgages reduced risk to investors by

establishing standards for the borrower and the property.

7. Mortgage companies make FHA-insured loans in areas with capital shortages and sell the loans in capital surplus areas.

8. FHA-insured loans offer an attractive yield to investors because of to the dramatically higher interest rates.

9. The ceilings set for the maximum FHA-insured loan amount often fall behind the cost of real estate.

10.The length of time required to obtain a commitment from FHA contributed to the decline in the program’s usage in the 70s.

Documents

Residential Mortgage Lending: Principles and Practices, 6e