FHA Loans More Difficult and Expensive

FHA Loans More Difficult and Expensive

According to this MSN Money article, Last chance for lowest-cost loans (Coming soon to FHA-backed loans: Higher FICO scores and more cash at closing. The changes are needed to help keep the agency afloat.), Federal Housing Administration (FHA) loans are about to get more expensive and more difficult to obtain due to the financial problems that the FHA is experiencing that are a result of record FHA mortgage loan default rates. Simply put, the FHA is paying more out to cover loan losses than it collects in Mortgage Insurance Premiums (MIP) from FHA borrowers and, as a result, the FHA is going bankrupt. As usual, I am ahead of the curve and told you about this in my blog posts: FHA Will Tighten Underwriting and FHA in Deep Trouble: Default Rates Skyrocketing.  The debt hot potato game continues with private debt becoming public debt.  Rest assured that the end result will be more short sales and foreclosures.

According to the article, the Obama Administration announced that there will be 4 changes to the FHA loan process that are aimed at lowering the FHA default rate. Those changes are as follows:

• Increasing the minimum down payment required to obtain a FHA insured loan.
• Raising the minimum credit score needed to qualify for a FHA insured loan.
• Raising the cost of the FHA Mortgage Insurance Premium (MIP) and possibly changing how FHA mortgage insurance premiums are collected.
• Reducing the amount of the buyer's closing costs that the seller will be allowed to pay (i.e. possibly reducing this amount from 6% to 3%).

If you are a Middle TN homeowner, property owner, condo owner, real estate investor, home builder or real estate developer who cannot pay your mortgage payments (due to losing your job, having your income reduced, illness, health problems, adverse business conditions, slow sales, loss of investment property tenants, vacancy issues, lack of funds to complete the project, feuding business partners, etc.), know that you will not be able to pay your mortgage, have defaulted on your mortgage, are already in foreclosure, or owe more than your home is worth, please contact me to discuss your options including a loan modification and a short sale (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home). I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I primarily help sellers (homeowners, property owners, condo owners, owners of high end homes and properties (estate homes, luxury homes and executive homes), real estate investors, home builders and real estate developers) of distressed real estate, short sales, pre-foreclosures, foreclosures, investment properties, failed new construction projects and struggling commercial real estate developments located in Middle Tennessee (Rutherford County TN, Williamson County TN, Davidson County TN, Robertson County TN, Maury County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN, Belle Meade TN, Nolensville TN, Spring Hill TN, Gallatin TN, Springfield TN and Mt. Juliet TN).  If you do need to short sell your home or property, or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.

FHA Will Tighten Underwriting

FHA Will Tighten Underwriting

According to this Inman News article, FHA will tighten up in 2010, "The Obama administration is moving to tighten underwriting standards on FHA-backed loans by increasing the amount of upfront cash homebuyers must bring to the table, raising minimum FICO scores for new borrowers, and reducing maximum seller concessions from 6 percent to 3 percent." Many industry experts and insiders believe that this will result in the FHA raising the minimum down payment from 3.5% to 5.0%, raising the minimum credit score to around 620 and reducing (from 6% to 3%) the amount of closing costs that the seller can pay on behalf of buyers. The reason that the FHA is taking these measures is that the FHA is currently experiencing record default rates and is insolvent as a result of the FHA's role in becoming the de-facto replacement for the extinct subprime mortgage market. I covered this issue in my blog post FHA in Deep Trouble: Default Rates Skyrocketing.

If you are a Middle TN homeowner, property owner, condo owner, real estate investor, home builder or real estate developer who cannot pay your mortgage payments (due to losing your job, having your income reduced, illness, health problems, adverse business conditions, slow sales, loss of investment property tenants, vacancy issues, lack of funds to complete the project, feuding business partners, etc.), know that you will not be able to pay your mortgage, have defaulted on your mortgage, are already in foreclosure, or owe more than your home is worth, please contact me to discuss your options including a loan modification and a short sale (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home). I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I primarily help sellers (homeowners, property owners, condo owners, owners of high end homes and properties (estate homes, luxury homes and executive homes), real estate investors, home builders and real estate developers) of distressed real estate, short sales, pre-foreclosures, foreclosures, investment properties, failed new construction projects and struggling commercial real estate developments located in Middle Tennessee (Rutherford County TN, Williamson County TN, Davidson County TN, Robertson County TN, Maury County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN, Belle Meade TN, Nolensville TN, Spring Hill TN, Gallatin TN, Springfield TN and Mt. Juliet TN).  If you do need to short sell your home or property, or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.

FHA in Deep Trouble: Default Rates Skyrocketing

According to this Nashville Business Journal article, FHA reserves feeling the squeeze, and this CNBC article, FHA Cash Reserves to Fall Below Required Levels, high levels of FHA loan defaults have pushed FHA cash reserves below the mandated minimum levels.

Both articles state that the head of the FHA said that the agency will not need a tax payer bailout, that the FHA will hire a chief risk officer and that underwriting criteria will be tightened including higher minimum credit scores and stricter appraisal rules. The Nashville Business Journal article quotes the new release statements of FHA Commissioner David H. Stevens as saying "To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action. That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections."

According to the Nashville Business Journal article, the FHA has become an increasing source of mortgages for first time homebuyers. The problem is that the article also quotes a statistic from the Mortgage Brokers Association, which shows that about 1 in 6 FHA borrowers were behind on their mortgage payments (i.e. in default). That is a 16.67% mortgage default rate.  In other words it is TERRIBLE!  This will ultimately lead to lots of FHA foreclosures and short sales.

While I would like to believe the FHA's statements about not needing a bailout, I cannot. Mark my words, the FHA will indeed need a bailout. You just cannot lend people 96.5% of the purchase price of their home in a declining market and not expect large numbers of foreclosures. Even if the market was flat the FHA buyers would have negative equity due to the cost of selling a home exceeding their down payment.

Due to the Middle Tennessee housing market having relatively lower housing prices and incomes than other areas of the country, there are a lot of FHA home purchases. As a result expect a lot of FHA foreclosures and short sales in Middle Tennessee.

My Real Estate Market Thoughts of the Day

This post may be a bit of a ramble so I apologize for this in advance. I just had to get some things off my chest.


The last time the real estate market melted down (think late 80's/early 90's) it took 7 years for homes to regain their losses. This meltdown is far worse because it is not just due to real estate over development/over building. It was caused by debt. Plain and simple. That is why the folks in Washington cannot fix this problem - you cannot fix a problem caused by debt with more debt. It defies logic and reason. The facts are that even at their current reduced levels, home prices are still out of line with incomes when compared to historical trends. Therefore, contrary to NAR homes are not actually affordable (Side note: I really cannot stand the NAR Home Affordability Index. Since when did Realtors become used car salespeople hawking homes by pushing the monthly payment instead of the price of the home?).

The reason loan modifications will not work is that they do not address the core problem: mortgage balances are too high relative to the market value of the homes. Many homeowners are actually now underwater (i.e. mortgage balances exceed the value of their home). According to a recent Deutsche Bank report, by 2011 about 48% of all US mortgages will be underwater. Since being underwater is now the #1 statistical driver of defaults (not credit scores) you can bet on high foreclosure rates for years to come.

Since the entire economy was built on consumer spending, and that consumer spending was fueled by debt, and that debt is no longer available you can be sure that when things do actually turn around unemployment will still remain relatively high with a likely range of 6-8% as opposed to the 4-5% range we enjoyed a few years ago. Based on the persistent debt problem and the long term unemployment problem I just do not see how the real estate market will recover anytime soon.

This whole thing is sadly comical. You have nonsense from NAR and the mainstream media about how the real estate market is turning a corner and recovering yet foreclosures and unemployment keep increasing. The US real estate market has never recovered under such circumstances and this time will not be the exception. Almost every day I fell like screaming "STOP THE NONSENSE." If our policy makers would just let housing prices decline to their normal (historical) sustainable levels and get rid of the FHA loans, other low/no down loans, ARM loans and other artificial financing not only would this type of problem never happen again, but the social engineers in Washington would not have to worry about "affordable housing" since housing would in fact ALREADY BE AFFORDABLE. Sometimes the answer is just plain old common sense. I predict that values will continue to fall rapidly through 2011 (when the large wave of Option ARM foreclosures ends) and then continue to decline gradually until the foreclosure rate reduces to normal levels and the unemployment rate reduces back down to a more realistic 6-8% mentioned above. At that point real estate values will recover at the normal 4-7% per year.