Posted by Greg Perry at 9/18/07 10:55 a.m.

I forgot to mention in my post that the administration is also arguing that lower down payment requirements should not be limited to first-time buyers, saying that it could make it harder for homeowners to refinance existing mortgages into an FHA-insured loan.

Posted by buddhabrad at 9/18/07 11:43 a.m.

$362k is a mansion in most parts of the country. Ditto $417k.

Seems like a workable solution would be a regionalized set of limits. But to do so would add increased bureaucracy and "red tape".

You can't have it both ways.

Posted by Larry K Cragun at 9/18/07 12:22 p.m.

My position on what changes should be made are on two fronts: 1- Increasing FHA availability for any market and any market condition 2- Consider it as the single best thing the government can do as a pseudo bail out of those in trouble. The changes can be far reaching and would not be a hand out to those who made bad choices. I spoke to the first point in my comments last night.

Regarding the second point: By not raising the loan limits they fail in one of the 11 ways they can help. I believe they will fail in almost all, but let us have hope. To be specific as to why I support this: FHA is not a government gimme. It is a government guarantee the mortgage will be paid or the lender compensated for losses. The program pays positive cash flow to the government in that their is a type of mortgage insurance fee charged the borrower. It is reasonable and more than pays for the reimbursements made to the lenders that suffer a default. Raising the loan limits makes sense to me as it broadens those that can be helped. FHA has rules such as good credit, 3% equity, stable employment, etc. I am not proposing we lighten up on those rules. In fact, the buzz is to lower the 3% to 0 down. I say no to that. People can save 3% or get a family gift. Sadly, this is the only change I see our politicians signing on to.

Since the program is profitable, and there are borrowers with ARMs they need to get out of: let them out via FHA, if they qualify.... And that is my take on it.

Posted by Greg Perry at 9/18/07 1:28 p.m.

Larry,
Do you think raising to $417,000 is sufficient, or do agree with Barney Frank going all the way to $500k?

Buddha, thanks for joining. Yes, it seems that regional limits have merit. Bush is currently proposing $417k for high cost areas and $217K for low cost areas.

I think my biggest FHA questions is will LO's start supporting FHA loans more widely? Most of the LO's I know dropped their FHA programs. As Larry pointed out yesterday it costs LO's a lot to do FHA loans. Will LO's be forced by the market to change?

To me it looks like one of the governments main remedies for assisting people in bad loans will be FHA and FHASecure.

Posted by Justin W at 9/18/07 3:13 p.m.

I think LO's have already started to support FHA loans in an effort to maintain a certain level of business volume in a changing market. Granted, they are still not being used as often as before but at least they are making a comeback.

I also think that raising the FHA loan limit will not only benefit the market, it will also create more awareness to consumers that FHA is now an option. I bet LO's will have more requests for an FHA loan than they did in the past.

The fact that FHA is a profitable program means the government should do what they can to increase volume (thus creating more money) while at the same time keeping the default rate to a minimum (through good underwriting practices).

Posted by Greg Perry at 9/18/07 4:30 p.m.

Justin,
Thanks for joining the conversation. You're in favor of raising the loan limit. I'll ask you the same question I asked Larry. Do you favor Bush's $417k or Franks idea of a $500k loan limit (which is jumbo territory)?

What are the differences, if any between qualifying credit scores for say a $400k FHA loan and a Fannie Mae loan? And for that matter, what ARE the main differences between FHA and Fannie Mae from the eyes of the consumer?

I agree with your assessment. As soon as loan limits raise, we'll start seeing a lot more FHA product.

Posted by Jon Dillingham at 9/18/07 5:34 p.m.

Raising the FHA loan limits is really a ho hum proposition at this point. As the FHA program is currently constituted it provides only marginal help at best for borrowers. Now that the Nehemiah and Nehemiah look a likes have been eliminated and now that FHA requires an upfront FHA premium for condo loans, the last two real good reasons for doing an FHA loan have been largely eliminated.
Over the past few years it has been our experience that nearly any borrower that could qualify for an FHA loan could also qualify for an agency product and usually get a better deal. In fact there have been a number of occasions over the past few years when we have not been able to qualify a buyer on an FHA loan but were able to qualify the same buyer on a Fannie or Freddie loan with at as least as good if not better terms. Now granted this might just be anecdotal evidence, but that is what we have experienced.
FHA has largely been marginalized. The myth that FHA could step in and help those borrowers that utilized Sub Prime or Alt A products is just that a myth. The only way that could happen would be a complete revamping of the program that would make it a seriously money losing proposition. That would leave the tax payers holding the bag. I'd rather have the security holders hold the bag. If the free market couldn't make Subprime and Alt A loans profitable the government would create an unmitigated disaster well beyond the proportions we are experiencing today.
The agencies have the risk base pricing alternative suggested by FHA covered with expanded approval loan programs. Again unless FHA just rolls over on underwriting standards at tax payer cost they can't improve upon the Fannie Freddie models that address these alternatives.
The only way that the FHA program could be bootstrapped into becoming a realistic alternative to Jumbo financing would be if the conforming limit on agency loans was held to $417,000 while the FHA program went above $417,000. That just is not going to happen; Fannie and Freddie's lobbies are just too formidable. If both the agency and FHA limits are increased over $417,000 why would anyone use an FHA loan, right now, they are harder to get and more expensive.
If you want to try to help the"mini" jumbo market (417,000 to 500,000) don't waste valuable political capital on trying to increase FHA loan limits. Take that same effort and energy and direct it at increasing the agency limits. That could make a real difference.

Posted by Justin W at 9/18/07 6:21 p.m.

To address your question Greg, I think they should look at increasing the conforming loan amount past $417,000. Since Fannie and Freddie have many aggressive programs, this single step would help buyers who are trying to obtain a Jumbo loan. As far as FHA is concerned, I think raising it would benefit a lot of people. However, I am not sure it would be a good idea to raise the FHA loan limit up to $500,000. Although I can see a lot of benefit for the real estate market, I am not sure if it would be in the best interest of FHA to take such a drastic step. If we could raise FHA loan limits past its current levels and also raise the conforming limit past $417,000, I think it would have a positive impact on the market.

If FHA raised their loan limits to $400k in high cost areas and kept their guidelines the same, they can approve a loan down to a 580 credit score. A similar program through Fannie Mae without an expanded approval could be as low as 620. However, Fannie Mae will allow for a debt to income ratio of up to 65% while standard FHA guidelines call for 43% (this can be higher with compensating factors). All of these guidelines may vary with each scenario.

Posted by Larry K Cragun at 9/18/07 7:01 p.m.

Ok, a lot of action since I have been here. I will take it in pieces as there is good conversation going on. First, Greg, I do think $500,000 is the right limit. I see no reason to make it a low income program, none.

Posted by Larry K Cragun at 9/18/07 7:09 p.m.

As I read Jon Dillinghams comment I immediately assumed he did not have FHA as a product. Every one that has bad mouthed FHA to me doesn't have it, or understand the rules. I went to his website and it doesn't say a thing about FHA.

FHA is much more lenient to borrowers in many ways. The rates are similar to conventional. I guess I will make a post on all the benefits. They are too many to just run up on a comment.

I guarantee you, once I found FHA my career to a giant turn. I held back starting my own company until I was FHA approved.

To say it is ho hum is ignorance. Sorry Jonny

Posted by Larry K Cragun at 9/18/07 7:13 p.m.

The more I read Jon's comments the more concerned I am. FHA underwriting standards are fine. I am not saying to make them easier, just that more people will qualify, good borrowers. As an example: Conventional loans are underwritten by automation. Try and get a lender to take a loan without DU or LP approval. It won't happen. FHA can be manually underwritten. Some issues can be accepted by an underwriter that are rejected by the computer model. It goes on and on, I will write that post. Lar

Posted by Larry K Cragun at 9/18/07 7:20 p.m.

Greg, basically credit scores don't count with FHA. Of course an 800 score FHA is hustled through. I have closed people with FHA with scores in the 500's. Try that on Jon. An example of a reason: The borrower went bankrupt. Many of the debts went to collection. The bureaus still show them. The credit score is down the tubes. The underwriter has the authority to prove the case to the file and do the loan.

Another example: Borrower went BK just over two years ago, took out new credit, had a problem not too many months later, fixed the problem but still showed the lates, had perfect credit on two or three credit accounts for the last twelve months. Ahah, turned down by DU and LP, approved by FHA.

Both of these examples the borrowers scores were so low they were denied conventionally.

Posted by buddhabrad at 9/18/07 7:23 p.m.

For those of you who have forgotten....

FHA loans ARE low-income loans. (Don't split hairs on this. Low-income people are vastly more likely to be looking for a home that qualifies for an FHA loan than anyone else.)

And we already had "risk-based pricing". It was called an ARM.

Posted by Larry K Cragun at 9/18/07 7:27 p.m.

And finally, FHA vs Subprime. All too sad this story is says Yoda. Lazy, unkowning, criminal, naive, uneducated to the full market regarding product, and loan officers that just didn't care sold subprime where they could have sold FHA.

I guarantee it. A few were brought to me by realtors that were concerned for their clients. In these few cases I was able to be the hero by taking them FHA or sending them to find it.

It actually happened Monday. I sent a borrower to Rhonda Porter of theMortgagePorter.com .. She is moving the borrower from a $150,000 worthless subprime approval to a $225,000 FHA approval. The rate will be 2%lower. The catch, they have to wait 3 months. Big flippin deal.

Posted by Greg Perry at 9/18/07 7:49 p.m.

Thanks for mixing it up, guys. Jon, thanks for chiming in. As I openly admitted, I haven't had all that many FHA deals in my career.

I'm learning here, and clearly the landscape on the product is changing, anyway. Like Buddhabrad, my perception is that FHA is a low income product. Clearly that looks like it's about to change, as well, as Congress is looking to adjust the loan limits upward.

Larry and Justin don't see any problem raising the loan limits past $417k. My questions is, wouldn't be better to adjust Fannie Mae, Freddie Mac loans upward to $700k? FHA allows only 3% equity (and maybe less if changes are made) and that seems like it could put "jumbo" borrowers in trouble in declining markets. Any thoughts?

Posted by Greg Perry at 9/18/07 7:58 p.m.

Larry,
Looking forward to your post DU vs. manual underwriting.

Posted by Rhonda Porter at 9/18/07 8:05 p.m.

Thanks, Larry. FHA is a great tool and the limits should be increased. I'll take $417k if that's all we're given...$500k would be great. One of the last FHA refi's I did was rescuing a borrower out of a subprime ARM who had mid-high 500 scores. Their payment/credit history over the previous 12 months were fine. The FHA refi allowed them to go up to a 95% LTV and even with the upfront and monthly mortgage insurance, they're saving hundreds each month. It's common sense underwriting. If you don't receive an "automated response"; a real live human-underwriter can approve the transaction (if it fits FHA guidelines).
With fewer options (such as piggy backed second mortgages) FHA is a great option for LTVs over 80%.

For the record, I'd like to see conforming loan limits raised, too. Conforming and FHA loans are two different animals.

VA loan limits are $417k for a zero down purchase...why not FHA?

Posted by Greg Perry at 9/19/07 6:18 a.m.

Thanks for popping by Rhonda!

Posted by Larry K Cragun at 9/19/07 8:20 a.m.

Rhonda makes the point. Thanks. Great Discussion. If only Hillary, GW, and the lawmakers would join in, then we would have something. Lar

Posted by sandykaduce at 9/20/07 8:42 a.m.

I can't figure out where Jon Dillingham is coming from, other than that maybe as Larry suggests, JD is a mortgage broker who doesn't offer FHA, and therefore bad-mouths it.

I've worked on several FHA purchases for buyers this year who otherwise could not have bought a home. It is a fabulous program. I don't know that it's as easy on a Loan Officer as slamming a borrower into an inappropriate sub-prime loan, but I believe it's a god-send to those who need it, and if those of us in the industry have to work a little harder to earn our pay, maybe that is not so bad a thing.

At this point, I wouldn't consider referring a client to a lender who doesn't offer FHA, even if my client didn't choose to go that route. Reason? Because the FHA is vetting the lender to make sure they're not some fly-by-night operation, and also, I want my clients to have the full spectrum of options available to them.

That said, FHA may still be less useful in Seattle even with raised loan limits, given the substantially higher prices than we see up here in Snohomish County. Still, I think it is a great option for those it can help.

Posted by Jay Maak at 12/19/07 1:42 p.m.

I don't see an issue with raising the loan amounts. Really my point of view is FHA loans are only underwritten as full doc loans. So with this being said you typically have to maintain a backend ratio of 47. Really the max loan amount can be whatever. I don't see any arguement in this. If a guy makes 10 K a month and has no payments on credit then he should be able to afford a 4,700 payment.

If FHA was a stated program then yes I can see having a cap on loan amount. But with DTI ratio's being set to dictate loan scenarios I don't see an issue with what ever the loan limit is set at.

Posted by JeffMG at 1/3/08 7:14 a.m.

Just wanted to quickly jump in on this subject, coming from the consumer point of view. I am utterly shocked by those in the mortgage business not seeing the current or potential future benefits of the FHA loans/products. I have bought 3 houses in my lifetime and looking to purchase another home now, though I am awaiting the possible rise in FHA limit, which will affect the "size" house I buy. My credit scores are hovering around 580 and have consistently scored out from 560-612 over the past 8-9 years (the period during which all three houses were purchased. Although I have always paid my home and car notes on time, I have had a few scenarios where I have late piad a time or two. These few late pays coupled with the debt to balance on my credit lines has always caused my ratios to be 580-612. Although I have worked hard and tried to raise them to 620+, I can not seem to get there. My income is such that I can afford $300K plus home, although I hope to buy in the 215-260 range. That said, my dilemma is that until FHA raises the limit, I am capped at the current 201K (Houston, TX) FHA limit until raised since I can get approved FHA all day long, but not on conventional without hefty rates that cause the purchase to be a bad decision. My first home I bought was about 9 years ago and I was 26 years old. I had little knowlege of how the mortgate insdustry works and went with a friend's friend to close the loan, thinking I could trust him. This "trusty-worthy" broker did not tell me about FHA and it ended up costing me $12K to buy down to a rate consistent with what I could have received with FHA. The next two houses I bought were different and I was able to secure a great rate with FHA. I believe there are many people in my predicament (500-624 scores) that could afford and pay the mortgate. Again, my take from the consumer side is those mortgage "guys" who do not offer FHA are proabably missing a big piece of the pie.

Posted by EagerToLearn at 1/17/08 7:15 p.m.

Thanks for your expert insight. I was told about 2 months ago by my "trust-worthy" mortgage co. that FHA was raising their limits. This would help me and my family tremendously and we are about to stress out waiting for the announcement concerning the limit. Does anyone have any idea when this is going to occur?

At this point, I almost feel as if my mortgage company might be pulling my chain. Thanks for any time and effort on this question.

Posted by bolesb11 at 1/21/08 4:35 p.m.

Any insight into how quickly a change might come in the FHA program would be greatly appreciated. My wife and I are under contract on our first home and need to come up with a $17K down payment that would be eliminated by a raised loan limit. It sounds like a great program that could only be improved by some timely revisions. Thanks for your help!