Rising losses may spur calls for the FHA to begin to reduce its role in the market.

The FHA is due to release the results of the audit, which estimates the value of the agency’s reserves to be down almost 50% from an already low estimate last year. This large drop is largely the result of home-loan defaults that have risen, while home prices continue to drop, which together cause greater losses on the sale of foreclosed homes.

The FHA doesn’t make loans, but insures lenders against defaults on those mortgages that meet its standards. The FHA’s troubles highlight one of the side-effects of the government’s efforts to revive the housing market. In the past few years, as private lenders have shied away from the mortgage market, the FHA’s share has grown dramatically.

It’s this increased role in the mortgage market that is draining the FHAs resources. Every year, auditors make estimates regarding the agency’s future losses and measure that against its existing reserves. Using that formula, the audit found that the agency’s reserves are set to cover only 0.24% of all its insured mortgages, less than a quarter of the 2% level it must stay above according to federal law.

As it stands, the FHA has not run out of money, nor has it requested funds from the Treasury. However, the possibility exists that if home prices suffer greater declines, which is about a 50% chance, the FHA’s reserves could be completely depleted, forcing the agency to seek government assistance.

A cause for concern is that mortgage delinquencies continue to be high on FHA loans, even as they drop among many others. The rising losses may spur calls for the FHA to begin to reduce its role in the market.

See also:
Downpayment assistance from the FHA
FHA Purchase Loans: Don’t “Assume” You Know It All Till You Read This!
FHA – the next big bailout

Government takes a back seat in hopes that the private sector will help stimulate the mortgage market.

This move concerns those in the housing industry who feel that pulling back will renew the pain in many areas that has not yet recovered amid the ailing economy.

The issue involves loan limits that were expanded by Congress three years ago, which allowed Fannie and Fannie to purchase mortgages that exceeded the national cap.

After the mortgage market meltdown of four years ago, private mortgagers retreated and interest rates jumped on mortgages that were too large to be backed by Fannie, Freddie, or the FHA. This expedited price declines in high-end markets where expensive homes couldn’t be purchased with a loan backed by the government.

To check the prices fallout, loan caps were raised by Congress in these-end markets. Extensions were passed to keep these higher limits in place each year since, but not this year. This resulted in limits dropping by more than ten percent in many areas.

The reasoning behind the decision by policy makers to allow limits to fall is the hope that private owners would begin to hold more mortgage risk; bringing down loan limits is a way to open up to these investors.

The loan limits, however, don’t seem capable of impacting the overall housing market very much. In the end, the loan limit issue simply underscores the larger challenge in restoring private capital and reducing the weight on taxpayers: housing markets remain unstable and the government continues to offer better terms than private companies.

Any move that increases borrowing costs could bring in private investors; the problem, however, is that this could push home prices down, which may do more harm to the economy than good.

See also:
Government-Backed Loans: House to Decide Fate of Loan Limits
Government’s Role in Mortgage Finance System
Government Grants for Homeownership

Much of the coming change originates with the slow but steady withdrawal of the government from the home lending game. With over half of all mortgages in the country originating under the auspices of government entities such as FHA, the steady increase in premiums and fees associated with these loans is already altering the lending landscape. Government efforts to push borrowers back into private sector loans by making federally-backed loans more expensive will likely cause those same private loans to become more expensive, shutting out potential buyers and making home financing more difficult to obtain.

In addition to the rising costs of borrowing, the scrutiny borrowers will undergo in the lending process will increase as well. Higher credit score thresholds (such as the new 720 watermark already instituted by FNMA), lower debt-to-income ratios, and the potential requirement for 20 percent downpayments are also likely to winnow the potential pool of buyers.

That these subtle but important changes will cause change is clear. How the veritable government pull-out from the mortgage markets will affect the delicate stability of the nation’s housing market remains unclear. Players with heavy stakes in the industry, including the National Association of Realtors, have voiced loud opposition to the government retraction, suggesting that the unique socioeconomic and cultural role of housing makes the reassurance of federal backing imperative. Critics of the government’s role in housing (and the implicit risk to taxpayers) insist that the government is not intended to serve as a foundation for real estate, and that private sector will move in to pick up the financial slack—at a cost, of course, to borrowers.

The likely legislative outcome walks the murky middle ground between the do-or-die scenarios, making it likely that federal agencies will dramatically scale back their mortgage involvement, while sticking around as a stabilizing force in the event that the country witnesses another housing meltdown. Whether that meltdown will be caused (or prevented) by a government pullout remains to be seen.

This couple refinanced to a low rate

Do you have an FHA loan? Do you have over a 6% interest rate? Well if you do, what are you waiting for? FHA streamlines are as good as gold these days but they are not always going to be easy to get. Today, streamlining an FHA loan really doesn’t take that much effort. There is no appraisal or income verification. Really, the only requirements now are: You must have at least a 620 credit score, be employed and have an FHA or VA loan, that’s it. Soon that will all change, by the end of the year streamlines will require an appraisal and we all know what that means. If you don’t have equity in your home (which most home owners don’t anymore) that means that lenders will not approve a streamline refinance. This is going to pose a big problem for those of you who haven’t taken advantage of streamlining your FHA or VA loan yet. Anybody with one of these loans that also has a high interest rate probably should refinance with a streamline soon, especially if you’re not sure if you have equity in your home or not. Most likely if you bought your home more than 2 years ago you don’t. I’m not saying that you’ll need equity in your home for the purposes of taking money out, because that’s not what a streamline is about, but at this moment lenders are paying off up to 105% of what you owe on your home without finding out what the home is worth. In the future this will soon change; lenders will require an appraisal and if your home isn’t worth more than what they are paying off the lenders won’t approve the refinance. So if you are thinking about doing a streamline refinance, I would suggest not waiting any longer. You can get a rate somewhere in the mid to low 5’s depending on your situation. But if you keep waiting any longer you might not qualify in the future.

Up until now any person trying to qualify for a FHA loan would need a credit score of at least 620. Now that has all changed. Once again the lending industry is making it tougher and tougher to get approved for a new home loan. As of September 14th 2009, anyone looking to qualify for a new FHA loan will be required to have a least a 640 credit score of higher. This requirement doesn’t come from HUD or FHA, but from the lenders and investors. Now 20 credit points higher isn’t that big of deal, but it can be if you’re trying to buy a house and you’re sitting with a credit score of 622. If anyone is facing this problem, they should follow some quick credit score clean up tips.

First, if you have multiple credit cards with balances, try paying one off at a time rather than spreading the money out evenly. Pick one card to pay off and pay the minimum amounts on the others. When that card is paid off, move on to the next one. A big factor in determining your credit is the is the percentage of your available credit. Stay current with all payments. No matter how hard it is, make sure you don’t skip a payment on any of your debts. Whatever you do, try to make at least the min payment. Defaulting on a payment will take a hit to your credit and that’s the last thing someone will need when trying to qualify for a new loan. Other things you can do is to check your credit report to see if there are any unknown delinquencies. This is a very common problem. If there is anything that is incorrect, you should always dispute with all three credit bureaus. By law an investigation will take place within 30 days. Also, make sure you don’t close any unused accounts; many people make this mistake all the time thinking that it will improve their FICO score when it can actually harm it.

Doing all these things can definitely up your credit score and hopefully move you up past a 640 score so when you go to get a new FHA loan you won’t have any problems getting qualified.