The current mortgage landscape is suffering from a series of aftershocks following the mortgage industry’s 2007 major quake. It used to be easy to find the right ingredients for cooking up a solution to whatever financing challenge arose. But that was yesterday. And this ain’t your mama’s kitchen anymore.

Today’s rules are tomorrow’s moldy muffins. And the burning question from one week to the next is: will your approval still be good when you go into Contract?

The Problem with “Overlays”

Aside from constantly changing rules, banks apply their own “overlays” on top of normal lending guidelines. Take this example. FHA rules have this to say about credit:

“Neither the lack of credit nor the borrower’s decision not to use credit may be used as a basis for rejecting the loan application. We also recognize that some prospective borrowers may not have an established credit history. For those borrowers, and for those who do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means…”

Okay, seems reasonable. Some people don’t use credit or they’re young and haven’t acquired much credit. So we build alternative credit. But, here is today’s Chase email:

“Effective June 27, 2008, Chase will no longer accept nontraditional or alternative credit histories for FHA loans. ”

So, alternative credit is fine with FHA but not if your applying for an FHA loan through Chase. You see the problem? And who’s next? Often these notifications are a shot across the bow that other lenders will soon follow suit.

Automated Underwriting, the Non-Standard Standard

Fannie Mae and Freddie Mac both have their proprietary Automated Underwriting Systems (AUS). Fannie Mae’s is called Desktop Underwriter (DU), Freddie Mac’s is Loan Prospector (LP). Each is slightly different and prioritizes risk a little differently. It used to be true that once you had a DU or LP approval, you could take that to any bank and they would accept it as is, confident that they could unload those loans in the secondary market.

These days however, banks have their own AUS engines that overlay more restrictive rules, rendering a direct DU or LP approval questionable if not entirely worthless. It all makes for shaky ground, where an approval this week may not stand next week. And as buyers in Sacramento compete once again for lower priced properties, often taking months to secure a home, the question remains: Will today’s approval still be good tomoorrow ?

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When FHA Secure was announced by the Bush Administration back in August of 2007, the FHA folks were perplexed. I know because I called them. First of all, FHA had already been doing unlimited CLTV refinances for a couple of years. Second, you didn’t have to be in default on your mortgage to qualify. And third, nobody had any idea what the hell the administration was talking about.

Those familiar with the Cervantes classic Don Quixote will remember Alonso Quixano, the county gentleman who descends into fantasy and reconstructs a farcical reality in which he fights unwinnable battles with imaginary enemies. The familiar phrase “tilting at windmills” has become iconic for the persistent pursuit of futile endeavors.

Still With Me?

Watching the administration and Alphonso Jackson of HUD descend into their own farcical reality has been disappointing. Like the great novel’s second half, the tale of FHA Secure appears to have evolved into a deliberate deception most painful to those for whom FHA Secure initially appeared to offer some hope.

Peter Berg, whose terrific watch dog blog FHA Mortgage Guide keeps close tabs on FHA financing, brings forth the disappointing reality of the statistics vs. the claims, as reported by HUD itself.

Despite the hundreds of thousands of homeowners Jackson claims to have helped (you will note that the these numbers are always in reference to FHA loans in general), “the glaring failure of the FHASecure program,” as Berg points out in his recent post FHA Mortgages at Mid-Year: Real Numbers Comes Out, is that “just 1,729 delinquent conventional borrowers have been helped in a period of six months.”

That’s a far cry from from the spin.

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The new, temporary FHA and Conforming Loan Limits for 2008 were announced today by the Office of Federal Housing Enterprise Oversight (OFHEO). For the Sacramento Metropolitan Statistical Area (MSA), the new loan limit for single family homes is $580,000, a substantial increase over the current conforming loan limit of $417,000 and the current FHA loan limit of $362,790. You don’t live in Sacramento? Check your area here.

Weird Math

This a nice surprise! I was pretty sure that with a median price in the low $300k range as reported by DataQuick and NAR, the new limit wouldn’t offer Sacramento home owners much relief. But here’s the part that was not apparent in the language of the bill. This is from the OFHEO list:

the maximum temporary loan limit is calculated as 1.25 times the median house price for the highest priced county in the property’s metropolitan or micropolitan area

Ah! That makes a big difference.

The Final Puzzle Piece

So the last piece of the puzzle fits into place when we learn how the lenders will price the “jumbo conforming” loans. FHA says there will be no premium charged for the higher-than-normal FHA loan limits, but Freddie Mac has already declared that the new conforming loans will be segregated into different pools based on the increased risk of early payoffs.

Stayed tuned for that pricing, but let’s get your jumbo loan dialed in and ready to go. Rates are on the upswing, and we may not see rates fall any further.

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The new, temporary FHA and Conforming Loan Limits for 2008 were announced today by the Office of Federal Housing Enterprise Oversight (OFHEO). For the Sacramento Metropolitan Statistical Area (MSA), the new loan limit for single family homes is $580,000, a substantial increase over the current conforming loan limit of $417,000 and the current FHA loan limit of $362,790. You don’t live in Sacramento? Check your area here.

Weird Math

This a nice surprise! I was pretty sure that with a median price in the low $300k range as reported by DataQuick and NAR, the new limit wouldn’t offer Sacramento home owners much relief. But here’s the part that was not apparent in the language of the bill. This is from the OFHEO list:

the maximum temporary loan limit is calculated as 1.25 times the median house price for the highest priced county in the property’s metropolitan or micropolitan area

Ah! That makes a big difference.

The Final Puzzle Piece

So the last piece of the puzzle fits into place when we learn how the lenders will price the “jumbo conforming” loans. FHA says there will be no premium charged for the higher-than-normal FHA loan limits, but Freddie Mac has already declared that the new conforming loans will be segregated into different pools based on the increased risk of early payoffs.

Stayed tuned for that pricing, but let’s get your jumbo loan dialed in and ready to go. Rates are on the upswing, and we may not see rates fall any further.

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The new, temporary FHA and Conforming Loan Limits for 2008 were announced today by the Office of Federal Housing Enterprise Oversight (OFHEO). For the Sacramento Metropolitan Statistical Area (MSA), the new loan limit for single family homes is $580,000, a substantial increase over the current conforming loan limit of $417,000 and the current FHA loan limit of $362,790. You don’t live in Sacramento? Check your area here.

Weird Math

This a nice surprise! I was pretty sure that with a median price in the low $300k range as reported by DataQuick and NAR, the new limit wouldn’t offer Sacramento home owners much relief. But here’s the part that was not apparent in the language of the bill. This is from the OFHEO list:

the maximum temporary loan limit is calculated as 1.25 times the median house price for the highest priced county in the property’s metropolitan or micropolitan area

Ah! That makes a big difference.

The Final Puzzle Piece

So the last piece of the puzzle fits into place when we learn how the lenders will price the “jumbo conforming” loans. FHA says there will be no premium charged for the higher-than-normal FHA loan limits, but Freddie Mac has already declared that the new conforming loans will be segregated into different pools based on the increased risk of early payoffs.

Stayed tuned for that pricing, but let’s get your jumbo loan dialed in and ready to go. Rates are on the upswing, and we may not see rates fall any further.

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The Senate’s FHA Modernization Bill, S 2338 flew through with a 93 to 1 vote yesterday. The House previously passed its own slightly different FHA reform bill in September. The measure will now go to a committee to work out compromises between the two competing version before the final draft is forwarded to the Oval Office for signature.

Two of the key issues are:

1. Raises the maximum FHA loan amount to $417,000, putting it in parity with conventional loan limits.
2. Lowers the required down payment to 1.5% from 3% (the House version eliminates the down payment requirement altogether)

Passage of this legislation to modernize FHA would complete a series of reforms that began a couple of years ago as FHA began eliminating many of the disincentives that drove buyers and sellers to subprime mortgages.

No longer are pest reports and clearances automatically required for all structures, and the old FHA “non allowable” costs have been virtually eliminated. With the increased loan limits and falling prices, these consumer-friendly loans will be available to more homeowners and will fill the ugly void left by the departure of the sub prime lenders.

Did you know that most lenders today are not approved to do FHA loans? And unless a lender was in the business before 2000, it isn’t likely they’ve ever done a single FHA or VA loan. Do you really want to trust your escrow or your client’s escrow to someone like that?

So ask your lender: Are you HUD approved?

More importantly, ask: how many FHA loans have you actually done?

If you don’t like the answer, Contact me for a quote or apply for a loan here. I do mortgage loans in most of the western U.S., and I’ve been doing FHA & VA loans for almost two decades.

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With the tide shifting back toward old-school underwriting, source of down payment is once again becoming an issue. Conventional loans often require that the borrower have 5% of their own funds, and that money must be “seasoned”.

FHA is different and far more flexible.

Did you know that FHA loans do not require that the borrower have any of their own money? And there are no “reserves” required. Here are a few acceptable and interesting sources for an FHA down payment:

1. Gift funds, from a blood relative or charitable organization. The donor must sign a standard industry Gift Letter stating that no repayment is required, and you must prove the donor’s ability to gift funds. In other words, plan on getting a bank Read the rest of this entry »

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