The Federal Housing Administration (FHA) announced recently that it intends to make modifications to its Home Equity Conversion Mortgage (HECM), a reverse mortgage loan insured by the federal government, to make it more attractive and cost effective for older home owners looking to tap their home equity.
A HECM is a reverse mortgage that is insured by the FHA. It is designed to enable elderly homeowners (62 years or older) to borrow against the equity in their home without having to make monthly payments as is required with a traditional mortgage or home equity loan. Under a reverse mortgage, the borrower receives the funds as they wish in either a lump sum payment, monthly payments over time or on a “as-needed” basis, with the interest on the loan accruing and increasing the loan amount, but the outstanding balance is not due until the last borrower leaves the home, sells or passes away. One of the great things about a reverse mortgage with regard to the borrowers heirs is, if the balance due upon settlement of the loan exceeds the value of the home, the FHA insurance covers the difference.
The department’s plans to implement a new variant of the product, referred to as the “HECM Saver,” that will provide seniors with a reverse mortgage option that significantly lowers upfront costs by virtually eliminating the upfront Mortgage Insurance Premium that is required under the standard HECM option. There will be changes to the existing HECM loan as well (now referred to as a “HECM Standard.) The introduction of the HECM Saver and changes to the HECM Standard are expected to be effective this October.
The cost saving in upfront fees is able to be achieved because the amount of money available to a borrower, an amount known as the “principal limit,” under a HECM Saver will be reduced, substantially lowering the risk to the FHA insurance fund. Borrowers will receive approximately 10% to 18% less under the HECM saver option, than they would under the HECM Standard option.
FHA Mortgage Changes Now in Effect
If you are looking to get an FHA home loan there are some changes you need to know about that just went into effect on April 5th. The changes are not all bad, fortunately, but the expensive one for borrowers is the cost of upfront mortgage insurance premium.
The upfront mortgage insurance premium has increased from 1.75% to 2.75% at the closing table. That is some serious money when you are buying a home. However, the reality is that borrowers are going to be on the lower end of the credit scale so this makes sense for the government program to add in the extra protection.
FHA has turned into the lender of last resort as the credit market has tightened for many borrowers. But if your credit is dinged and you can make a significant down payment the program is not too bad.
Under the FHA Reform Act of 2010, anyone with a credit score between 500 and 579, and at least a 10% down payment, can probably obtain FHA financing. Additionally, purchasers with 5% or 10% to put down on a home could see lower mortgage insurance premiums. Other changes include decreasing the amount of seller contributions allowed from the current 6% down to 3%, and increasing the down payment amount to a straight 3.5% of the purchase price. When compared to conventional loans, these changes make FHA loans a more expensive loan option. Even so, many first time home buyers have trouble obtaining the 5% down payment required on conventional loans. FHA calculations estimated a reduction of 40% in loan originations it they were to implement a 5% down payment option.
7.2 Million U.S. Homes Now Behind on Payments
According to the latest January 2010 Mortgage Monitor Report by Lender Processing Services, home loan delinquency rates in the U.S. have now surpassed 10 percent. Factoring in foreclosures in process, the total non-current rate sits at 13.3 %.
When extrapolated to reflect the entire mortgage industry, this rate indicates that more than 7.2 million mortgage loans are now behind on payments. In addition, an estimated one million properties are now owned by banks. The January 2010 Mortgage Monitor report is an in-depth summary of mortgage industry performance indicators based on data collected as of December 31, 2009.
Within the population of loans that were current as of year-end 2008, the percent of "new" serious delinquencies is 4.64 percent – higher than any other year analyzed for the same period. Of loans that were current as of December 31, 2008, by December 2009 there were 2.3 million new loans that were considered seriously delinquent. Prime loans, including agency, non-agency and jumbo, have experienced deterioration at a worse pace on a relative basis than subprime, FHA and all loans as a whole. Within the prime loans category, loans with current unpaid principal balances between $417,000 and $600,000 have performed the worse.
The Mortgage Monitor report also indicates that 2009 vintage loans are performing better than loans from any of the prior five years and have been steadily improving as more origination months are added to the pool of loans. This improvement is attributed to more restrictive underwriting guidelines. The report also noted that liquidity is still not available where it is needed most.
Key Results in LPS January 2010 Mortgage Monitor Report:
* Total U.S. loan delinquency rate is now 10.0%
* Total U.S. foreclosure inventory rate is 3.2%
* Total U.S. non-current loan rate is 13.3%
* More than 7.2 Million Loans Behind On Payments
* Estimated 1 Million Properties in REO Status
* States with most non-current* loans: Florida, Nevada, Mississippi, Arizona, Georgia, California, Indiana, Michigan, Illinois and Ohio
* States with fewest non-current* loans: North Dakota, South Dakota, Alaska, Wyoming, Montana, Nebraska, Vermont, Colorado, Oregon and Washington
FHA Loans: Waiting Will Cost You Big Time
The FHA is making proposals to change mortgage insurance premiums, FICO (credit score) and down payment combinations and seller concessions. The changes will be posted in the Federal Register next month and after a comment period would become effective early summer.
With these rule changes, an FHA loan could cost you 10% more to close. That's $25,000 on a $250,000 loan.
3.5% Down Payments and seller concessions of up to 6% will soon be a thing of the past for many. Mortgage insurance premiums will also increase by 1/2 point.
Here is a quick summary of the changes:
- Increase upfront Mortgage Insurance Premium (MIP) to 2.25% – up 0.5%
- Decrease seller concessions from a maximum of 6% to a maximum of 3%
- Change FICO score/down payment combinations to as low as a 3.5% for a FICO Score above 580 and up to 10% for a FICO Score below 580.
So, with a FICO score below 580, the amount of out-of-pocket money to close an FHA loan would increase by about $25,000 on a $250,000 mortgage ($1,250 MIP, $7,500 increase in seller’s concession, $16,250 increase in down payment). This would be added to the current total cost, an increase of 10%. A FICO score above 580 could still add about $8,750 or 3.5%.
The FHA is taking these actions to reduce troubled mortgages in the future. They will also be making changes to reduce fraud.
These actions will allow them to add to their reserves against bad loans. As a home buyer, these changes will increase your overall costs to borrow tremendously.
Stay tuned, we'll keep you updated on these FHA Loan changes as they become effective.
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