When it comes to finding FHA news articles, the Wall Street Journal seems to be becoming my new Seattle P-I or CNNMoney.com. The WSJ had another FHA article today, this time focusing specifically on the risks of putting zero down on a home. The article, which has an accompanying blog post, focuses on the reasons why eliminating DPA could be critical to the survival of FHA, and the response from the DPAs and other supporters, particularly those who are closely tied to minority and poverty issues. Others feel that the programs need to be changed, but not eliminated:

Seller-funded groups and supporters in Congress say that such programs should be regulated but not shut down, a proposal that HUD hasn’t shown much interest in in recent years. “If there’s a problem, let’s fix it,” says Rep. Gary Miller (R., Calif.), a vocal defender of the program and a former home builder and developer.

Whether or not DPAs will go away, the article concludes with a sure bet:

Rep. Frank said in an interview that he believed a compromise could be reached with the Senate that would preserve the program but with tougher lending requirements. “No one is talking about leaving it untouched,” he says.

Tonight’s episode of Larry King Live will feature experts offering advice for Americans facing foreclosure. I’m willing to bet that there will be FHA talk – at least there better be!

The episode will be airing at 9 ET.

The Wall Street Journal posted an article the other day that is very critical of two FHA issues that I also happen to be very critical of:

The dangers of zero down are assessed:

The biggest reason the FHA lost so much money was a scam called the “downpayment assistance program.” Under this program, builders or mortgage originators make a loan to low-income homebuyers, and then arrange for a third party to pay the downpayment, so the loan qualifies for FHA insurance. This means borrowers have no skin in the game, and in many cases have negative equity because the value of the homes are often inflated.

Borrowers could bet on the upside of the market at no cost to them. And thanks to the 100% FHA insurance against default, lenders were guaranteed full repayment whether or not the loan is ever repaid. Until recently, lenders even got a tax write-off for their “charitable contribution.” Everyone won – except the taxpayer. Now even the FHA finally agrees that this program invites widespread fraud and wants to end it. But Barney Frank, who heads the House Financial Services Committee, is insisting that it continue.

One lesson from the debacle is what happens with low or zero downpayment FHA loans: They go bust. The Government Accountability Office finds that default rates are about three times higher than on conventional loans. So why in the world is Congress promoting a new FHA bill to lower downpayments to 3% and in some cases even to zero?

Although I find the article to be a bit overly critical when it comes to the FHA program as a whole, I wholly agree with DPA and sub-prime issues.

On June 2, 2003 the FHA began enforcing a rule that it would not insure mortgages for houses that had been sold more than once in ninety days, effectively preventing flippers from using FHA Loans to finance their enterprises. The justification for this rule was to prevent people from using FHA Loans to finance houses that were “fixed up” in a short period of time and then selling the property for a grossly inflated price, as well as stopping genuine scam artists who would repeatedly sell the house to fake buyers. A May 7, 2003 article from the Realty Times does an excellent job describing the details.

CNNMoney.com reports today that the rule has been suspended for one year. The decision is based on the enormous number of foreclosed properties that are sitting empty and destroying market values. Hopefully honest flippers will take advantage of this suspension of the guideline and help revitalize many distressed neighborhoods.

An article on Inman News details new guidelines for HOPE NOW, the program for helping homeowners facing foreclosure. Two such guidelines set deadlines for how long servicers have to inform borrowers of their options:

The new HOPE NOW guidelines state that loan servicers should inform homeowners within 45 days whether their application for a workout — such as a repayment plan, loan modification or short sale — has been accepted or denied.

Servicers also agreed to re-subordinate second-lien loans if their position will not be worsened by a refinance or workout — potentially removing a major obstacle to preventing foreclosures in cases where borrowers have “piggyback” second loans. HOPE NOW servicers will also attempt to contact homeowners with subprime adjustable-rate mortgages (ARM) and other homeowners with ARMs that have a probable risk of default 120 days in advance of reset.

These new guidelines have been put in place to make HOPE NOW a more effective tool for distressed borrowers.

The more I learn about the Frank-Dodd plan, the less I like it. It focuses far too much on fixing past bad sub-prime loans and not enough on creating a plan to make FHA work for the future. Basically, they are forgiving those who made bad decisions and neglecting those who are trying to use the FHA program and practice in responsible lending and borrowing. An article by former House majority leader Dick Armey in today’s Wall Street Journal delves into these problems. There is strong opposition within FHA and some shocking facts that back up the sentiment:

On June 9, FHA Commissioner Brian Montgomery told reporters that he opposes the Dodd-Frank approach, saying that the FHA “is not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans.” Last week the Congressional Budget Office (CBO) projected that banks will use the program to offload their “highest-risk loans” to the taxpayer, and that a stunning 35% of all of the loans refinanced through Dodd-Frank will eventually default on the FHA.

35%!! Wow, that could literally destroy the FHA. There has to be a better solution that does not reward irresponsible corporations and punish not only lenders, but potentially the FHA itself.

Did you know that HUD, the Department of Housing and Urban Development is in the business of selling homes?  Well, that is not exactly the case but it is something that home investors should consider.  If you are considering an FHA loan, or you are looking for a combination of a low priced home with a low priced mortgage, then you definitely want to look at the opportunities that HUD offers.

At HomesSales.gov, you can find a listing of some of the most current homes for sale from the US Government.  Now, before you worry too much, consider what these homes are on the market for.  Many times, taxes go unpaid, seizes happen, or the properties are simply turned over to the government for other reasons.  Yes, in some cases, it has to do with criminal situations, but the government is selling these homes through a public auction, which means that you could get them for next to nothing.

Is The Price Right?

Some of the homes available are quite low in price simply because the government needs to sell them.  Just as if banks have homes that they have foreclosed on and are trying to sell as quickly as possible, the same is true for these US Government homes for sale.  When you visit their website, you can click on the state of your choice and see the properties in question.

For example, through a quick search, I found that a four-bedroom home for sale in Anaheim California is at under $370,000.  That is good for that area.  It tells me why the home is in the hands of the government (in this cases it was forfeited.) and it tells me many of the specs of the home.  As you can see, the process is simple to do, but you cannot make your purchase on that website (this is not eBay after all.)

Getting Into The Homes

Rather, you do have to work with a real estate agent that has approval to sell through HUD.  Many (if not most) are.  When you work with the agent, you will be able to get even more details and find out when the auctions are held.  In most situations, these government homes for sale auction through real estate agents, though some do allow the public to come and make their bidding happen.

Funding for such a purpose can be complete in a number of ways.  It is usually necessary to have a detailed document from your lender approving you for the loan in the amount of at least as much as the auction price.  Most auctions do require that you have preapproval for a loan or show that you have the necessary cash to pay for the property.

Should You Buy This Way?

Some people may believe that purchasing foreclosed or government seized property is in bad taste, but it is one of the best investments you can make.  Most of these properties are in decent shape, having working systems throughout them and are a good value.  If you couple this with an affordable loan (you may qualify for an FHA loan), you could be saving yourself a substantial amount of money in the process.

Before purchasing any home, you should have the opportunity to see it and inspect it.  Contingencies are allowable on most auctions.  While this sounds like a great opportunity for an investor, and it is, it can work well for any homebuyer looking for an affordable way to get into a home of their dreams.  There are no guarantees about the overall condition of any home, of course, as each is different.

The Seattle P-I has always been a great source for FHA-related articles and the paper’s diligent coverage seems to be spreading to the locals. Seattle real estate professional Samuel Hilbert addresses the growing number of FHA Loans being used in the Seattle area. There is a great photo on his site, AgentSamuel.com, that shows signs advertising FHA & VA Financing for local communities. His site features lots of other excellent information on Seattle real estate, and real estate in general. I recommend checking it out!

Although I primarily write about the standard FHA Home Loan, the FHA has a number of programs for helping out homeowners. One that I haven’t mentioned in awhile is the Reverse Mortgage. An article in yesterday’s Seattle P-I talked about the benefits of reverse mortgages and who they benefit most. Plus, the article details new changes that may allow more seniors to take out reverse mortgages:

Pending legislation may spur more senior homeowners to consider reverse mortgages. Those who have enough equity in their homes can qualify for loans of as much as $362,790 backed by the Federal Housing Administration. A housing bill in Congress includes a proposal to raise the payout to as much as $550,000 and eliminate the current limit of 275,000 reverse mortgages that the Department of Housing and Urban Development can insure.

As with any loan product, reverse mortgages aren’t for everyone; but if the circumstances are right, an FHA Reverse Mortgage could be a great choice for many Americans.

Congress has made up its mind: it is now in the mortgage business, or at least trying to be. In two proposals, Congress has decided it will help risky home loan holders a helping hand. The problem with such a program is that the details show the difficulties. The program is expensive for already hurting lenders, and borrowers do not getaway without anything either.

The plan is for the government to back some of the more risky mortgages that have put so many lenders in trouble. While it may not sound bad, the problem is how such a program would work, beneficially. Key questions need answers, for example, who would qualify for such help? What would borrowers (as well as lenders) have to do to get into the program?

What is In The Works?
The House has passed a bill that would give the Federal Housing Administration the ability to insure mortgages to those people who are at risk of losing their home to foreclosure. Another bill is in the Senate, and that one gives us a better idea of how the process would work.

In these bills, to qualify, the homeowner would need to be a full time occupant of the property. They must have a debt to income ratio of more than 35 percent. Lenders and borrowers have voluntary participation. Borrowers can contact lenders and lenders can contact borrowers. The lender gets the final say, though, in if the borrower may participate.

Here are a few more points to keep in mind:

• If a homeowner has a second mortgage, the holder of the second loan must eliminate the debt.
• FHA backed loan qualifying individuals may be excluded from the program is the lender believes there is too much risk involved.
• No borrower is turned away just because they are delinquent on the existing mortgage they have or because of their credit score (solely.)
• The lenders must be willing to accept no more than 85 percent of the appraised value of the home (which will include loan fees and closing costs factored in.)
• All FHA backed mortgages must be 30 year fixed rates to qualify.

Look at the math.

A home now valued at $200,000, with a borrower that has an upside down mortgage owing $220,000. The owner’s debt to income ratio has to be over 35 percent, so that means if he makes $4,000 a month, his mortgage debt must be more than $1400. Once he qualifies like this, the process moves on.The FHA program would guarantee 90 percent of the appraised value. This means that the new loan would have to be written down by the lender to $180,000. The remaining value gives the homeowner equity of 10 percent. Also, the lender will need to pay the FHA 3 percent of the loan amount to participate in the program as well as providing another 2 percent for closing costs. That amounts to an additional, $9000 on this particular loan.

When everything boils down here, the lender loses $29,000.

The borrower also has to pay the FHA 1.5 percent in an annual premium to the FHA. The amount of this will diminish over time as the principal on the home falls. An exit fee may also be on the loan, which would be more than 3 percent of the FHA loan amount originally. From the borrower’s look, there is a high risk of being able to get out of the loan affordable if they sell the property over time.Perhaps the most troubling aspect of this Congress made loan process is that it is so confusing. While costly to the lender and to some borrowers, the FHA loan offer here may be an option for some situations. Nevertheless, it has not become law and President Bush has threatened to veto it. He and other critics believe that the taxpayer is being asked to pay some $300 billion worth of poorly backed, bad loans through the program. President Bush has called in irresponsible for both lenders and borrowers.