If there was one major takeaway from the National Crime Prevention Council’s 2013 Mortgage Fraud Virtual Conference, it was this: The mortgage market, while no longer a wicked stepchild of the housing crisis, must still be carefully monitored. Though its tantrum-throwing days may be over, the $1.1 trillion government loan industry has the potential to cause serious economic damage should fraudulent mortgage activity persist unchecked.
“What is old is new again,” says Michael Stolworthy, Director of Fraud Prevention for the U.S. Department of Housing and Urban Development. “We’re starting to see some disturbing trends. The same old type of mortgage cases are coming up.”
False statements on loan applications, inflated appraisals, and loan modification schemes are just some of the ways fraud is reappearing in the mortgage market. And with government loans on the rise—the number of mortgages insured by the Federal Housing Administration has nearly doubled since 2006—the potential for mortgage fraud increases, especially among applicants in shaky financial condition.
“Back during the mortgage boom, people who had taken out second and third mortgages were living the champagne lifestyle on a beer budget,” says Robert Simken, a former real estate practitioner turned police officer in Eustis, Fla. “Now, those same people are living in homes that are underwater and willing to do just about anything to get out of their bind.”
Problems arise when that “anything” includes turning to loan counselors, lenders, and alleged real estate professionals who make promises they never plan to keep. “If an opportunity comes along that seems too good to be true and the little hairs on your neck stick up and say ‘danger,’ don’t just ignore them,” Simken warns.
Through public outreach campaigns and educational seminars, organizations like the National Crime Prevention Council stress the importance of using an accredited real estate professional when contemplating any property transaction. “Half the people haven’t checked the qualifications of the individual helping them buy a home,” says Ann Harkins, CEO and President of NCPC.
Simkens agrees that home owners should seek advice from a noted professional. “You don’t go to the butcher for brain surgery and you don’t go to a brain surgeon for chopped meat,” he says. “It’s important to find an expert and not just someone who shows up and can recite the jargon.” Continue reading »
Major news outlets have been talking about the Obama Administration possibly requesting $943 million from the U.S. Treasury this year to shore up the finances of the Federal Housing Administration. But whether the 80-year-old agency will actually need the cash infusion is far from clear.
The $943 million figure is part of the Administration’s fiscal 2014 budget proposal, but it’s simply a projection based on current conditions. Whether the funds will actually be needed won’t be known until September, six months from now, when the current fiscal year ends.
Today’s headlines about the bailout stem not from the agency’s single-family mortgage portfolio but from its portfolio of reverse mortgage loans, which it calls home equity conversion mortgages (HECM). These are loans that enable seniors to draw a steady stream of monthly income by tapping the equity in their house. FHA backed almost 55,000 reverse mortgage loans in 2012, making it the biggest participant in the market by far.
FHA Commissioner Carole Galante has since taken steps to pare back the agency’s reverse mortgage risk. Among other things, the agency has reduced its insurance exposure by eliminating its standard, fixed-rate reverse mortgage product, reducing the maximum amount of funds available to borrowers.
Agency Has Played Big Economic Role
The agency has really been the unsung hero of the housing market since the downturn hit several years ago, and the pressure on its reserves is the price the federal government has been paying to help keep mortgage funding flowing to first-time buyers and moderate-income households while private lenders have pared back their lending in the conventional market through tightened underwriting standards.
Unlike in the conventional market, during the housing boom FHA never loosened its underwriting standards and its financial position remained strong during the downturn, which made it one of the most stable participants in the mortgage market after the crash.
Its market share grew considerably during that time while it took up much of the slack left by the private market. Part of its growth was also driven by federal policy changes that enabled hard-hit home owners to replace their troubled mortgages with safe FHA financing. As home values plummeted in 2005 and 2006, the FHA mutual mortgage insurance fund, the agency’s main vehicle for backing single-family mortgages, came under pressure. But FHA was still able to retain its reserves for its congressionally required 30 years. (FHA also maintains a congressionally required 2-year surplus reserve account.)
FHA has since taken a number of steps to keep its finances healthy. These include increases in its upfront and monthly premium structures and tightening its enforcement over bad lenders.
The result has been a remarkable run. At a time when the two secondary mortgage market companies Fannie Mae and Freddie Mac were using Treasury funds to keep them operating after the federal government put them in conservatorship, and many of the country’s largest banks were taking assistance under the Troubled Asset Relief Program (TARP), FHA continued to operate under its own reserves.
Of course, even FHA came under pressure when home prices were seeing steep declines, and for a while last year it looked like the agency would need to tap Treasury funds to keep its reserve accounts fully funded, but in the end the improving housing market made that unnecessary as rising home values relieved much of the pressure on its reserves. The agency also received a one-time payment as its share of the National Mortgage Settlement. The National Mortgage Settlement is the 2012 agreement between five of the country’s largest banks and the federal government to address widespread problems found in the way the banks were processing their foreclosures.
The agency still has years of reserves left to meet all of its exposure should its entire portfolio of loans go bad. What it doesn’t have is the full 30-year requirement (plus the 2-percent surplus requirement), which is far beyond what banks and other financial institutions have to keep on reserve.
Lawmakers in the House are even looking at whether it’s time to reconsider the 30-year reserve requirement for the agency. Rep. Michael Capuano (D-Mass.), ranking member of the House Financial Services Subcommittee on Housing and Insurance, has introduced legislation to modify the 30-year reserve requirement. Rep. Maxine Waters (D-Calif.), ranking member on the full House Financial Services Committee, suggested in a recent hearing that it’s time for Congress to look hard at the requirement.
Were the requirement in fact eliminated, much of the pressure on FHA’s reserves would be relieved and the agency would be treated more closely to the way other financial institutions are treated.
Bottom line: The FHA has absorbed a lot of the problems in the housing market over the years and as of today it remains one of the lone housing finance agencies to come through the financial crisis without a bailout.
In the 90-second video above, House Financial Services Committee Ranking Member Rep. Maxine Waters (D-Calif.) asks NAR President Gary Thomas whether it’s time to revisit the 30-year reserve requirement for FHA. The question was posed during an April 10 hearing on the state of FHA. President Thomas was one of the panelists at the hearing, held by the committee’s housing and insurance subcommittee. Thomas said the requirement should be looked at.
Congress is looking at what to do about FHA in light of the pressure on its reserves and it’s clear from a hearing that senators held yesterday the agency presents them with a conundrum. Lawmakers acknowledge the indispensable role FHA played in the aftermath of the mortgage crisis and continues to play today, yet it’s equally clear the agency is in a tough spot, although given the pressure it’s been under it’s been managing its reserves remarkably well.
Testimony by market experts that appeared before the Senate Banking Committee yesterday indicated that the housing market, and the broader economy by extension, would have been in much worse shape had FHA not stepped in with affordable mortgage credit when it did. By some estimates, it prevented home values from dropping an additional 25 percent in the darkest days after the downturn.
Testimony also made clear that the cause of FHA’s challenge to its reserves is the very opposite of what caused the mortgage meltdown. The mortgage meltdown was caused by lax underwriting and confusion about the strength of the mortgages that collateralized the private-label mortgage-backed securities that were so popular among investors during the housing boom. FHA’s challenge is very different. It never relaxed it’s underwriting standards and it maintained the safety and soundness of its mutual mortgage insurance fund throughout the boom.
After the crisis, the federal government and private sector looked to it to help shore up the market, and it did, but as a side-effect of that, it took on a lot more borrowers at a time when the broader economy was struggling. As a result of many factors outside its control, including widespread job losses and declining home prices, a portion of the borrowers it took on struggled. The result is a shortage in one of its reserve funds. But even here, the problem is not as acute as it sometimes sounds in the media, because FHA maintains reserves for 30 years, a requirement that far exceeds the private sector.
Against this backdrop, NAR President Gary Thomas made a strong case for careful action by Congress as it decides what, if anything, it should do. He shared with lawmakers the compelling story of how FHA stepped in at a critical juncture and through little fault of its own, took a hit to its reserves. In a sense it saved the economy from a much bigger blow but it did so at the expense of its own reserve fund.
Snippets of Thomas’ remarks to the Senate Banking Committee are in the 3-minute video above.
Some positive news from FHA today on its condo financing rules, with more changes expected to come in the near future.
The changes should make it easier for borrowers—both investors who want to buy more than one unit and those who are buying just their primary residence—to get financing, which has tended to be more of a challenge than in the single-family market. With condo financing it’s not just the borrower who has to be approved—the project itself has to be approved. And that’s been a source of frustration for borrowers and the sales associates working with them.
Under changes announced today by FHA, investors can come in and buy more units in a project than they could previously. They can now buy up to half of the project units, up from just 10 percent before, but they have to jump through a hoop to get the okay: at least half of the units have to have already been conveyed to individual owners or be under contract as owner-occupied.
Projects can also have more space devoted to non-residential commercial uses than before. Up to this point, only a quarter of project space could be used for commercial purpose. Now half of the project can be, although certain authority for approval is reserved for the local FHA office.
These two changes together are fairly significant, but there are a few others worth noting.
One is a softening in the language about the representations made in condo board certifications. The penalties for false certifications by the board representative is the same, but with the new language, FHA is acknowledging that board representatives often rely on an attorney’s advice about the project’s compliance with state and local laws. It also removes language in which the person signing certifies he has no knowledge of circumstances or conditions that may cause a mortgage to become delinquent.
Finally, the agency is softening its stand on delinquent home owner’s association (HOA) dues. It’s now allowing up to 15 percent of a project’s units to be 60-days delinquent on HOA dues, up from just 30 days delinquent. This change acknowledges the tough times condo projects have faced as underwater owners of individual units struggle to pay their HOA fees.
Owner occupancy limits
Although these are good changes, one of the main impediments to FHA condo financing remains unchanged, and that’s the requirement that half of a project’s units be owner-occupied before anyone can get financing to buy. If the unit is an REO, the 50-percent rule is waived, but NAR wants to see the owner-occupancy requirement eliminated entirely. That’s probably the biggest hurdle for buyers today.
FHA financing limits
Another restriction that hasn’t changed is the number of units that can have an FHA-backed loan. Only half the units can have FHA financing, so a borrower can’t get FHA approval if his unit would put the number of FHA financed units over 50 percent. That limitation remains unchanged.
And what’s known as the “spot” approval process remains prohibited. FHA used to allow these spot approvals but eliminated them a few years ago and NAR would like to see them allowed again. These types of approval apply to new projects. FHA requires 30 percent of the units in a new project to be pre-sold before it will approve an application for an FHA-backed loan. With spot approvals, FHA used to allow individual buyers to get FHA financing even if the new building didn’t meet the 30-percent threshold, but that’s no longer allowed.
FHA says the changes announced today are interim measures and that it’s preparing a more formal and comprehensive rulemaking, so some of the changes NAR is seeking could still be forthcoming. In any case, NAR, which worked with other groups to play a lead role in getting FHA to make these changes, continues to talk to FHA officials about this important but still tough segment of the financing market, but today’s changes are a move in the right direction.
With baby boomers now well into their retirement years and many of them with elderly parents who are ready to move into a nursing home or assisted living facility, the likelihood of you listing or selling a home with a reverse mortgage is pretty good. About 700,000 of the loans have been made in the last decade or so, up from much smaller numbers before that, so you can see that the mortgages, which allow older home owners to extract the equity from their house, are a growing part of the residential real estate landscape. So, what do you need to know about them?
The biggest concern is that borrower continue to maintain the house. The lion’s share of reverse mortgages are federally backed by FHA, so there are minimum standards the borrowers have to meet to stay in good standing on their loan. For example, they have to continue to pay their utilities and property taxes, but they also have to keep the house in good repair. If they don’t. that could be grounds for the lender to foreclose on their loan.
But you could see a situation in which the elderly household has received all the proceeds of their reverse mortgage in a single lump sum. For lenders who offer fixed-rate reverse mortgages, the proceeds of the loan are provided in a lump sum. That’s so the lender doesn’t have to manage the interest-rate risk. For households in this situation, if they spend their money down quickly and are left with little income afterward with which to maintain their house, then when it eventually goes on the market it could be in poor shape. That will effect its potential on the market.
If the borrowers move out of the house to go into, say, an assisted living facility, the borrowers’ children might take over custody of the house and put it up for sale. Thus, if you’re listing or selling the house, you won’t be working with the owners but, in a sense, their surrogates. If the children grew up in the house they’ll be as familiar with the house as their parents, although if they haven’t lived in it for many years, they’ll have to get up to speed on its condition. At the same time, they’ll be trying to get a handle on their parents’ financial situation, which might not be entirely clear to them. Meanwhile, they might not have a full understanding of the reverse mortgage. Exactly how much equity is remaining in the house? That might not be as clear-cut as it seems, because the lender is charging interest against the loan every month. If the house sells for less than the remaining equity, are the children suddenly responsible for the difference? (No, that’s what the FHA insurance is for.) Only if the children switch gears and decide to keep the house do they have to come up with the balance if the equity in the home is insufficient to satisfy the mortgage.
In short, you can expect all sorts of perplexities surrounding a transaction in which children are selling the house and trying to sort things out themselves.
It’s with these matters in mind that we asked a reverse mortage lender and two executives of the National Reverse Mortgage Lenders Association to participate in a webinar with REALTOR® Magazine. They’ll be talking about the mechanics of paying off a reverse mortgage. And they’ll also touch on a program called HECM for Purchase, which is an FHA-insured reverse mortgage that can be used to by a house. HECM stands for home equity conversion mortgage, FHA’s name for a reverse mortgage.
The webinar is Thursday, June 28, at 3 p.m. Eastern Time. Register now for the event, called Reverse Mortgage Payoff Mechanics and HECM Purchases.
Speakers are Jerry Tomlin of Atlantic Bay Mortgage Group in Virginia Beach, Va., and Peter Bell and Steven Irwin of the National Reverse Mortgage Lenders Association.
FHA is lowering its mortgage insurance premiums to help borrowers refinance into lower interest rates, President Barack Obama announced yesterday in a national press conference at the White House. The initiative also includes help to members of the military who’ve been wrongly foreclosed on or denied a chance to refinance.
Under the FHA initiative, the agency is reducing its up-front premium to .01 percent, from 1 percent, for streamlined refinancings of loans originated prior to June 1, 2009, and cutting the annual fee for these refinancings in half, to .55 percent, from 1.15 percent.
The Administration says the two fee reductions together should save the typical FHA borrower about a thousand dollars a year, which is “on top of the savings that they’d also receive from refinancing,” President Obama said at the press conference. “That would make refinancing even more attractive to more families. It’s like another tax cut that will put more money in people’s pockets. We’re going to do this on our own. We don’t need congressional authorization to do it.”
In a scenario of how this would work provided by the White House, a typical FHA borrower with $175,000 outstanding on a mortgage would be able to reduce the monthly payments to $915 a month, assuming a new mortgage at 4 percent. Without the fee reduction, the monthly payment after a refi would be $1,010 a month.
The fee cuts begin June 11. (Details from HUD.)
President Obama used the press conference to urge Congress to pass elements of a broader housing assistance proposal he outlined in his State of the Union speech in January and which was subsequently fleshed out a few weeks later in another address. That proposal would apply the administration’s existing HARP program (Home Affordable Refinance Proposal) to all loans, not just those backed by Fannie Mae and Freddie Mac. To pay for that expansion of the program, a fee would be charged to the country’s largest banks, which received public help after the mortgage crisis hit a few years ago.
Under HARP, lenders agree to modify mortgages, even if the borrower is underwater, as long as certain requirements are met.
Under the assistance to home owners in the military, the administration says it will take the following five steps:
1. Conduct a review of every servicemember foreclosed upon since 2006 and provide any who were wrongly foreclosed upon with compensation equal to a minimum of lost equity, plus interest and $116,785;
2. Refund to servicemembers money lost because they were wrongfully denied the opportunity to reduce their mortgage payments through lower interest rates;
3. Provide relief for servicemembers who are forced to sell their homes for less than the amount they owe on their mortgage due to a permanent change in station;
4. Pay $10 million dollars into the Veterans Affairs fund that guarantees loans on favorable terms for veterans; and
5. Extend certain foreclosure protections afforded under the Servicemember Civil Relief Act to servicemembers serving in harm’s way.
Read a transcript of the President press conference yesterday.
There’s been considerable interest in the media in FHA’s financial position. The agency recently announced several increases to the premiums it charges borrowers to have their mortgage guaranteed by the agency. Those increases, along with some reports that FHA might request federal funds to shore up its reserves, make it seem like the agency is navigating a rocky period.
It is, but the agency is acting prudently and won’t need an influx of taxpayer funds this fiscal year, so its 78-year record of never having to request funds remains intact. Nor is there reason to believe right now they’ll need to ask for funds in fiscal 2013 or beyond, analysts say.
On the premium increases, the 0.10 percent hike that takes effect April 1 is mandated by law as part of the bill Congress passed at the end of 2011 to extend the payroll tax vacation. That bill required an increase in the guarantee fee that Fannie Mae and Freddie Mac charge banks for guaranteeing loans. Congress included the FHA increase in the bill, too, at least in part to create parity with Fannie and Freddie, NAR analysts say.
Another FHA premium increase, of 0.25 percent, is limited to jumbo loans, and another increase, of 0.75 percent, is specifically for helping the agency’s reserves.
With these increases and with funds the agency will receive from the “robo-signing” settlement with large banks the federal government announced a few weeks ago, the agency has enough funds to replenish its reserves for fiscal year 2012, NAR analysts say.
Does this mean FHA will be in trouble again next fiscal year, which starts in October? NAR analysts say it’s too soon to tell. The recent drain on the agency’s reserves stems in large measure from the loans originated shortly after the housing downturn, when the availability of mortgage financing was at its worst and borrowers flocked to the agency. It’s now working through those loans. But looking ahead, things probably won’t be so bad, in part because the loans it backed from mid-2009 to now are among its strongest ever, so defaults could drop accordingly.
In any case, the pressures on the agency’s reserves aren’t just from defaults; they’re from continuing weakness in home prices. As long as prices stay weak, the agency has to hold more money in its reserves. So, the pressure on reserves isn’t solely because of losses but because of high reserve requirements in the face of struggling prices.
More fundamentally, it’s easy to lose sight of just how much in reserves the agency has. Unlike banks, which hold one year of reserves for the loans they carry, FHA has to hold 30 years’ worth. So, when the agency says its reserves are dipping, that dipping is happening in the context of reserves equivalent to 30 years for each of the mortgages it covers. That means its reserves amount to something like almost $38 billion. That’s money it still has.
On top of that, FHA maintains a second reserve account of 2 percent of its 30-year reserve amount. It’s this 2-percent reserve that’s been dipping.
So, to put this all in perspective, the agency continues to have tens of billions of dollars, but while it’s working through the loans it supported right after the mortgage crisis, it’s feeling pressure on its 2-percent reserve account, and part of that pressure comes not from losses but higher reserve requirements while prices stay dormant.
Once the agency works through this tough period, NAR would like to see it revisit its fee increases and lower them as appropriate.
NAR President Moe Veissi has made a forceful case before a key congressional committee to protect FHA from potentially destabilizing changes to the agency’s main insurance fund. Some lawmakers have been talking about curbing the agency as a step toward reducing the federal government’s role in home ownership and also to shore up its reserves.
The agency maintains two reserves for its housing insurance program. One requires reserves for 30 years against loan losses, and another is a smaller reserve above and beyond the main reserve. The smaller reserve has dropped below a statutory limit.
Testifying before the House Financial Services Committee, Veissi said the housing market is showing signs of recovery, including in some areas that were among the hardest hit in the downturn. Should Congress make changes to FHA now, he said, while it’s one of the main home mortgage vehicles for households, the recovery could very well be derailed, and, with it, the struggling broader economy.
“If you diminish America’s opportunity, in any capacity, especially today when we’re just beginning to remove ourselves from one of the most horrendous housing situations the country has ever seen, then you do that at the peril of destabilizing the recovery,” he said.
By Robert Freedman, Senior Editor, REALTOR® Magazine
The fiscal year 2012 budget that the Obama administration released yesterday would pare back most housing and community development programs, including jobs-rich community development block grants, implement a planned hike in the annual FHA mortgage insurance premium, and even take a third stab at a twice-rejected proposal to trim the value of itemized deductions, including the mortgage interest deduction, available to upper-income households.
These are all important matters that will bear watching as lawmakers take up their budget resolution and decide which proposals to keep and which ones to scrap or modify. But one thing the budget doesn’t do is propose reducing the value of MID by changing it into a credit. That change to MID was one of the recommendations of the president’s bipartisan deficit reduction commission, which released its final report in December.
In fact, the deficit commission very much got short shrift in the budget proposal. Its signature recommendations, including scaling back entitlements by raising the age of Social Security beneficiaries, among other things, were left out, leaving those high-profile decisions for another day.
To be sure, the president’s budget wields a sharp knife when it comes to cuts. It proposes cuts to 200 programs, including the majority of the programs administered by the U.S. Department of Housing and Urban Development, which saw its budget cut by almost 3 percent. Most of the budget savings across the spectrum of government programs come from a five-year freeze on discretionary domestic spending (largely everything except military and entitlements), which is estimated to produce $400 million in savings. Continue reading »
By Brian Summerfield, Online Editor, REALTOR® Magazine
One of the biggest obstacles for a recovery in housing has been — and will continue to be — mortgage lending. Although rates fell to historic levels in 2010 and will likely remain relatively low through a good portion of this year, credit still isn’t easy to come by, even for many borrowers who would be considered safe in a normal market.
With that in mind, what can we expect in mortgage finance during 2011? Here are a few predictions, with help from Tom Wind, managing director at J.I. Kislak Mortgage, former CEO of JPMorgan Chase’s residential mortgage lending businesses, and former president and COO of CitiMortgage:
1. Several proposals will be made to reform and reconstitute Fannie Mae and Freddie Mac, but no new plan will be implemented this year. The U.S. Treasury Department is expected to offer recommendations to Congress this month on how to restructure the mortgage market, and incoming GOP representatives have made Fannie and Freddie reform a top priority for its agenda this year. However, Wind expressed some reservations about a speedy resolution to the issue. When some sort of reconstitution — or even replacement — of Fannie and Freddie does come, though, it will probably include an overt guarantee of government backing, he added.
“Government support is essential to a well-functioning market,” Wind explained. “There may be times when the market can function without it, but long-term, ensuring the liquidity of mortgages is essential.” Continue reading »