Actually, both claims are correct but the bigger issue is whether refinancing is actually worthwhile.

According to the letter my mortgage rate would drop from 4.63 percent to 4.46 percent if I refinance. That’s right, based on the APR or annual percentage rate, my rate would fall .17 percent. Not a partial .17 percent, not a fraction of .17 percent, but a full .17 percent. That’s about 1/6th of 1 percent.

But wait, there’s more.

And, yes, monthly costs would fall. For instance with a fixed-rate, 30-year $200,000 mortgage the monthly expense for principal and interest would go from $1,028.88 to $1,008.62. That’s a savings right there of $20.26 per month or $243.12 annually.

So the lender’s letter is literally true: I would have a lower interest rate and save almost $250 a year in this example.

Mortgage Rates

Despite the accuracy of the lender’s claims — which are subject to change along with the interest rate according to the letter — the offer is unacceptable to me. Here’s why.

How much would I have to spend at closing to save $250 a year? If closing costs $3,000 for transfer taxes, legal fees, title insurance and other expenses than it would take 12 years of mortgage “savings” to get back my money.

And why are mortgage rates at anywhere near 4.46 percent attractive in today’s world? The latest figures from Freddie Mac show that a typical 30-year mortgage is priced at 3.98 percent — that’s almost a half point lower than the offered rate.

Nope, I won’t be taking the lender’s offer.

But here’s the question: Why didn’t the lender simply repeat it’s last refinancing offer — an offer I took. In that case the rate went down almost a point, I saved about $200 a month and the lender paid all closing costs except prepaid taxes and insurance.

The lender and I both benefited. I got the lower monthly payment and the lender got a crisp, new loan to re-sell at a profit in the secondary market.

In other words, everybody won.

Mortgage Prepayments

The new refi offer doesn’t work because it’s one-sided — assuming the lender actually provides the terms mentioned in the letter (remember, they’re subject to change).

If I’m going to spend more money on a loan, I certainly would not pay $3,000 in closing costs to save $250 a year. Instead, I might simply increase the monthly payment by $25. While a $200,000 loan at 4.63 percent costs $1,028.88 per month, I might instead pay $1,053.88.

That would reduce the total interest bill over the loan term by nearly $10,000 — from $170,396.80 to $160,502.20 – and shorten the mortgage term by 18 months. This approach works regardless of whether the loan is an FHA, VA, or conventional fixed-rate loan. The concept also works for fixed-rate jumbo mortgages as well.

As to the lender — hey, write me again. Let’s redo the last deal at today’s rates. You know where I live.

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The Massachusetts official is turning over nearly 32,000 documents to state prosecutors on the grounds that they may be improper. As a result O’Brien says criminal investigations should be started.

If 32,000 documents are questionable in just one recorder’s office, then what is the total nationwide?

In considering this matter, let’s recognize that a sworn foreclosure affidavit is used by judges and courts to throw people out of their homes for not paying FHA, VA or conventional mortgages.

If the affidavit is wrong — or fraudulent — it means an innocent family can unfairly be made homeless by order of the court. This is a big deal, certainly as big as shoplifting or stealing a cow, crimes we seem to prosecute with great zeal.

The O’Brien release is below:

Saying that the time has come for a full scale criminal investigation, Southern Essex District Register of Deeds John O’Brien, today has sent some 31,897 of what he says are fraudulent documents that have been recorded in the Salem Registry to Massachusetts Attorney General Martha Coakley, U.S. Attorney General Eric Holder and U.S. Attorney Carmen Ortiz.

O’Brien said that he is asking these officials to impanel a Grand Jury to look into the evidence that he has presented.

“I am confident that these documents will show a pattern of fraud, uttering and forgery. These documents are signed by known robo or surrogate signers, whose signatures were supposedly witnessed by notary publics. In addition, these documents may contain fraudulent information in the body of the documents. I believe that a criminal investigation is the next step to hold the perpetrators responsible.”

O’Brien praised Attorney General Coakley for her aggressive pursuit of wrongdoing in her civil action but noted that other states such as California, Nevada, Illinois and Michigan have launched criminal investigations, and O’Brien is hopeful that Massachusetts will do the same.

O’Brien strongly suggests that the Grand Jury should subpoena both the past and present Chief Executive Officers (CEOs) of the Mortgage Electronic Recording Systems, Inc. (“MERS”), Bank of America, JP Morgan Chase, Citibank, Wells Fargo, Countrywide, Washington Mutual among others. In addition, he is asking that the top officials of DOCX, Nationwide Title Clearing, Inc. and LPS also be subpoenaed.

“These companies have been retained by MERS and its member-banks to produce the documents that I am alleging contain fraudulent information. It is one thing to go after these institutions with a civil action, but the only way to let them know that you are serious is to call them before a Grand Jury.” O’Brien said,

“There is no question in my mind that the officers of these banks and loan processing servicers made a conscious decision to commit fraud and participate in a scheme to deprive the public from knowing the true holder of their mortgage while at the same time avoiding paying billions of dollars in recording fees. It is my opinion that they acted as a criminal enterprise, crossing state lines to commit their crimes and in most cases using the U.S. Postal Service to send these documents to registries of deeds, thereby committing mail fraud. We need to know what they knew and when they knew it. Until the CEOs who allowed these fraudulent activities to happen under their watch are sent to jail for what they did, these types of illegal behaviors will continue.”

Just last week, O’Brien’s Registry received 3 documents from Bank of America, all signed by a known robosigner, Linda Burton.

O’Brien said, “If they are sending them to me, of all people, it is safe to assume that they are sending them to registries across the country.”

O’Brien refuses to record any documents signed by a robo-signer on his list unless those documents are accompanied by an affidavit attesting to the signature. So far, he has not received one affidavit.

“That clearly shows me that those documents were in fact fraudulent.” O’Brien said that if he or anyone else went into one of these major banks and forged a signature on a loan document they would be arrested and sent into jail.

So it begs the question, why haven’t these CEO’S been held accountable? O’Brien cited the case of the individual who walked into a Walmart and tried to make a purchase using a fraudulent One Million Dollar bill. He was arrested and charged with attempting to obtain property by false pretence and uttering a forged instrument.

O’Brien said, “As far as I am concerned, this is what these banks have been doing for years. Make no mistake, MERS and its member-banks are taking people’s homes using fraudulent documents and that is something we do not do in America.” In addition, O’Brien is zeroing in on the major foreclosure law firms that he believes have acted as a co-conspirator in flooding the registries of deeds with these fraudulent instruments.

“These attorneys should know better. They have acted as co-conspirators in perpetrating this fraud. I am sending a letter to the Massachusetts Board of Bar Overseers asking that they conduct an independent investigation into the activities of these firms. Unlike our Massachusetts Attorney General Martha Coakley, I understand that there are other Attorneys General and other public officials across the country who would like nothing better than to sweep this matter under the rug and grant these lenders, loan servicing companies and their foreclosure-mill attorneys immunity for the damage that they have caused, not only to our
economy but to people’s property rights. They would be willing to accept pennies on the dollar, a slap on the wrist, and a promise to never do it again.

“If that should happen, it would be the biggest sellout of the American People that I have ever seen. It would send the wrong message that the big boys can get away with anything. As I have been saying all along, they may think they are too big to fail, but as far as I am concerned, they are not to big to go to jail. The top officials at MERS, its member-banks, servicers and foreclosure-mill attorneys must be prosecuted and held accountable for their fraudulent schemes that brought profits to their institutions by cutting corners, circumventing land recordation systems through fraud, uttering and forgery.”

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“The investigations,” said HUD, “are in response to 22 complaints the National Community Reinvestment Coalition (NCRC) filed with HUD alleging that the loan activities of the mortgage originators showed that their home lending practices deny FHA- insured loans to African Americans and Latinos with credit scores as high as 640. Federal Housing Administration (FHA) guidelines allow mortgages to borrowers with credit scores above 580, provided the borrowers have down payments equaling 3.5 percent of the loan amount, or above 500, provided the borrowers have down payments equaling 10 percent of the loan amount.”

In the usual case lenders can set whatever terms they want to underwrite a loan. However, the FHA loan program is an important exception. Here’s why:

“This decision is arbitrary,” says John Taylor, president & CEO of the National Community Reinvestment Coalition, “because the loans are 100% guaranteed, whether the borrower’s credit score is 580 or 780. That means the loans with lower credit scores don’t pose additional risk to the company, so there’s no legitimate business defense for this across-the-board practice.”

To its credit, at least one lender — Quicken — has said it would stick with FHA credit score standards. Quicken was not among the 22 lenders named by the NCRC in its layering study.

“In an effort to make homeownership possible and more affordable for families across the country, Quicken Loans Inc, the nation’s largest online retail mortgage lender, announced they have eased the minimum credit score necessary to qualify for an FHA loan to 580. This change allows more consumers to qualify for an FHA loan, as previous guidelines required a minimum credit score of 620.”

Quicken also makes a good point regarding credit scores in general.

“There are folks who have steady incomes, and a solid payment history but were temporarily affected by the economy or a life event in some way. These challenges can lower their credit score significantly. We believe that a credit score, on its own, is not the sole arbiter of a person’s credit worthiness,” said Bob Walters, Quicken’s chief economist. “This change will open up credit to a significant group of people and allow them to again have access to purchase or refinance a home.”

Tight Credit Standards

With all the complaining about allegedly-tight loan standards — much of which is nonsense — there is simply no justification for FHA layering. FHA mortgages must conform to standards set by HUD, not artificial and arbitrary standards above and beyond what HUD requires. Lenders who simply follow HUD guidelines can be rewarded with originations, profits and 100-percent loan guarantees.

That’s not a bad deal for lenders, borrowers or the FHA. The evidence? For the third quarter of 2011 the Mortgage Bankers Association reports that the general foreclosure rate was 4.43 percent — but the foreclosure rate for FHA loans was 3.27 percent.

So do FHA mortgage borrowers still face credit score layering? The betting here is no. Expect the results of the HUD investigation in about a month.

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Think of it as a back-door tax increase. While the public was watching the payroll debate in Washington Congress was actually increasing the cost to finance or refinance a home.

The Temporary Payroll Tax Cut Continuation Act of 2011 was widely applauded because it prevented the Social Security withholding from increasing to 6.2 percent from 4.2 percent of wages. However, the extension is only for two months and is set to end as of February 29, 2012. In other words, the payroll tax debate will be renewed once Congress returns from the mid-winter recess.

New Borrower Costs

Buried in the payroll compromise are new costs for borrowers. Specifically, these new costs come in two forms.

First, Congress has directed Fannie Mae and Freddie Mac to increase the fees lenders pay by ten basis points or .10 percent. This new cost — called the g-fee — will begin April 1, 2012.

This increase is substantial. According to Market Watch, lender fees now amount to .26 percent of the loan amount. The congressional increase will cost borrowers with a $200,000 mortgage an additional $5,400 over a 30-year loan term.

Second, Congress has directed the FHA to increase its annual mortgage insurance premium or MIP by .10 percent.

The FHA, which is an insurance program, has two borrower charges.

• There is an up-front mortgage insurance premium which is now equal to 1 percent of the mortgage amount.
• There’s also an annual mortgage insurance premium which in 2011 was increased to 1.15 percent for most borrowers. It will now rise to 1.25 percent.

The annual MIP increase will be costly to borrowers. The expense of a $200,000 mortgage will grow by about $4,200 over the life of the loan.

Taken together, the two increases created in the payroll tax bill will raise the cost of a $200,000 mortgage by roughly $9,600 over the life of the loan.

Impact

The result of the congressionally-mandated increases is that FHA loans will be artificially less attractive.

So is the MIP increase necessary?

The purpose of the MIP is to collect money from FHA borrowers which is placed in a reserve called the Mutual Mortgage Insurance Fund. This fund is supposed to equal 2 percent of the FHA loans outstanding but is now below the required level.

However, HUD has reported to Congress that under the current MIP structure the reserve fund will grow to the required 2 percent by 2014.

Moreover, the policies and programs which created problems for the FHA loan system — policies and programs and put in place by the Bush Administration prior to 2009 — have been changed. For instance, the required down payment has been raised, the mortgage insurance premium schedule has been changed, “seller-funded downpayment assistance loans” have been eliminated and lender standards have been tightened. The results are plainly visible when looking at the FHA’s book of business

Lenders will pass through the new charges, raising home financing costs nationwide at a time when the housing market remains stalled. Higher mortgage costs mean borrowers will qualify for less financing so they will have less ability to pay higher prices. Home sellers will thus feel part of the fee increase in the form of less buyer demand and reduced pressure to raise prices.

The net result of the congressional action is that borrowers will needlessly pay more for FHA financing and home sales will suffer. Various politicians will no doubt explain how the legislation made the FHA reserve fund “more secure” when, in fact, it was becoming more secure without a further increase in borrower costs.

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And more hard news: on average folks who work in financial services make 52 percent more than you do.

“Corporate profits with inventory valuation and capital consumption adjustments) increased $32.5 billion in the third quarter,” said the BEA. So if company profits are on the rise should that not mean the government will collect more tax revenue and reduce the deficit? Er, no, said the BEA:

“Taxes on corporate income decreased $9.1 billion in the third quarter, compared with a decrease of $1.8 billion in the second.”

Well wait a minute. There must be some accounting in there which shows that for some reason corporate profits are down and therefore taxes should be lower.

Nope. That’s not it.

The domestic profits of financial corporations — banks, financial holding companies, etc. — increased $9.2 billion in the third quarter. Non-financial corporations saw profits grow by $17.9 billion.

You’ll Earn More In Banking

Notice that profits rose by $27.1 billion — of which 34 percent was earned by banks and financial companies.

In terms of income, the Bureau of Labor Statistics says the median wage of someone in the financial services field is $67,690 versus the general wage of $44,410. That’s a 52% premium.

Income, of course, is very important. The more you earn the more likely you are to get a good FHA, VA or conventional mortgage at a good rate — and the less likely you are to be foreclosed.

For the past few weeks the government has been debating the issue of whether to raise the payroll tax by 2 percent — but there has been little or no debate regarding an increase in effective corporate taxes. For all the yelling and screaming of those who claim that business is over-regulated and over-taxed, the plain fact is that while corporate revenues are rising corporate taxes are not — meaning Uncle Sam has less money from the very businesses it nurtures and protects until they are large enough to take jobs overseas, buy back their own stock and lay-off workers within our borders.

Today the top marginal tax rate is 35 percent for individuals. Under President Reagan the top marginal rate was 69% and it was 92% under President Eisenhower, 91% under Kennedy, 77% under Nixon and Johnson, and 39.6% under Clinton.

Deficit Interest

The real cost of the deficit lies ahead. Right now Uncle Sam has a mountain of debt but pays virtually no interest. As one example, Treasury inflation-protected securities, or TIPS, reached a record yield of minus 0.877% in mid-December.

Imagine the deficit if interest rates increase…and then try to imagine a world where interest rates will not go up at some point….

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“If somebody wants to buy a house,” he told CNN’s Piers Morgan, “it’s virtually impossible to get the money from a bank. And it’s — even if they have good credit. Even when mortgages are coming due, and people that have been paying a mortgage for 10 and 15 and 20 years, they can’t get money or they can’t get an extension from a bank. So the banks are really not behaving properly, that can I tell you.”

Really? I’d argue that mortgages today are widely available, as millions of people in just the past year can attest.

For instance, the National Association of Realtors says existing home sales were running at an annual rate of 4.97 million units in October — that’s up 13.5 percent from a year ago. If people can’t get mortgages then how are they buying homes? Yes, some buyers pay cash — 29 percent — but that means 71 percent got financing when they bought and 71 percent of 4.97 million existing home sales tells us that 3.5 million existing home transactions involved a mortgage.

Of course, people use mortgage money not only to buy real estate but also to refinance. The Veterans Administration, as one example, reports in fiscal 2011 that the government guaranteed 357,600 VA loans, including 186,600 purchase money mortgages and 171,000 refinances. Obviously, for these folks, mortgages were not “virtually impossible” to get, they are instead entirely accessible.

The same is true with FHA loans. In fiscal 2011 the government insured 777,521 purchase money mortgages and 420,561 loans to refinance, a total of 1,271,211 FHA loans.

Not everyone got an FHA loan. But roughly four out of five applicants did. There were 1,603,669 FHA mortgage applications in fiscal 2011, meaning 332,458 did not go through. But in any year some portion of all loans applications are declined or withdrawn, often for reasons which have nothing to do with the financing — think of a home with a structural problem or title issue.

And surely the mortgage business is not so bad for mortgage bankers. The Mortgage Bankers Association reports that “independent mortgage banks and subsidiaries made an average profit of $1,263 on each loan they originated in the third quarter of 2011, up from $575 per loan in the second quarter of 2011.”

In addition, said the MBA, “average production volume was $237 million per company (or 1,114 loans per company) in the third quarter of 2011, up from $174 million per company (or 866 loans per company) in the second quarter of 2011.”

You have to ask: If mortgages are “virtually impossible” to get then why have origination profits more than doubled? Why are originations up?

Loan Rates

It’s hardly a tough time to get a mortgage because home prices are about 19.1 percent lower nationwide than in April 2007 and mortgage rates are in the dumper. In recent weeks Freddie Mac has reported that both fixed rate mortgages and ARMs have been at record lows.

NAR says that as a result of falling home prices and low mortgage rates that affordability is at its highest and best level in years — something that could not happen without the ready availability of FHA, VA and conventional mortgage financing.

For background and more information, see Four Foreclosure Financing Myths on RealtyTrac.com.

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At first it might seem as though higher premiums are in order given that the FHA reserve fund — the Mutual Mortgage Insurance Fund or MMI — is well below the 2 percent required reserve. While that may be true, one must also look at trends and directions.

HUD Secretary Shaun Donovan says his department is now looking at five potential changes in the FHA program — including higher mortgage loan premiums.

According to Donovan, the “FHA is constantly evaluating the appropriate level of premiums given the potential risks to the MMI Fund, and any action regarding premiums will be considered in the context of balancing access to credit in today’s economic environment with the need for added revenue generation to protect the Fund.”

The reserve fund gets its money from the up-front and annual mortgage insurance premiums (MIP) paid by FHA borrowers. The fund is reduced each time there’s a foreclosure claim — and given today’s market there have been a lot of lost homes.

Donovan points out that “FHA’s current premium levels are the highest they have ever been in the agency’s history” so can they really go higher?

That said, you have to wonder if there is any need for higher premiums to increase the MMI fund.

HUD says that without a premium increase the reserve fund will reach 2 percent (1.99 percent) by fiscal year 2014 — we are now in fiscal year 2012.

One of the central results of higher FHA premiums is that they will drive away prospective borrowers. Higher premiums will make the FHA program less attractive and less competitive.

The Mortgage Insurance Companies of America (MICA) — the trade association that represents the private mortgage insurance industry in Washington — says the “FHA should increase its premiums, raise its minimum borrower down payment to 5 percent, and change the way FHA area loan limits are calculated.”

One by-product of such proposals is that the FHA program will become more expensive and thus less attractive to borrowers.

The truth is that the FHA program has changed substantially during the past three years.

For instance, the Mortgage Bankers Association points out that “in 2008, Congress passed the Housing and Economic Recovery Act. That legislation terminated the failed seller-funded downpayment assistance programs that were responsible for a disproportionate level of FHA’s defaults.”

In addition, the down payment requirement has been increased to 3.5 percent and insurance premiums have grown.

Because the FHA program has changed under the Obama Administration the huge risks and losses run up from 2000 through 2008 have been replaced with a more stable and financially-positive system. There’s no need to raise premiums, no need to make the FHA program less attractive and no need to help special interests.

Why FHA Premiums Should Not Be Raised is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Does this change make a lot of sense? No. Is this change the law of the land? Yes.

Let’s see what happened.

Mortgage loan limits were raised substantially in 2008. It was thought that higher limits will would help revive high-cost real estate markets in big cities and along the cost. After three years it became obvious that higher loan limits helped few but created additional risk for lenders and mortgage insurance programs, such as the FHA.

To solve the risk problem, Congress agreed to lower mortgage loan rates as of October 1, 2011. The rates were lowered and the world did not collapse. Indeed, the National Association of Realtors reported that in October existing home sales ROSE despite the lower loan limits.

With everything working well Congress naturally decided to raise FHA and conventional loan limits back to the pre-October 2011 levels. The new legislation passed with huge majorities in the Senate (60-39) and the House (298-121).

However, when the legislation got into a conference committee — representatives from both houses who are supposed to work out any conflicts in the two pieces of legislation — a strange thing happened: FHA conforming loan limits went up for two years and conventional loan limits remained stuck.

Always Smaller

It used to be FHA loans were always smaller than conventional loans for a very simple reason: FHA loans could be no larger than 87 percent of the conventional loan limit. So, if the conventional loan limit was $300,000 the largest FHA mortgage could only be $261,000 in the lower 48 states.

Now we have a situation where FHA mortgages can be bigger in high-cost areas than conventional loans. This is remarkable given how some lenders have worried that the FHA program will be over-utilized or that it allegedly will need billions of dollars in taxpayer bailout money. (See: Will The FHA Go Bankrupt?)

Also, some conservatives object to the FHA because it sells mortgage insurance, something the private sector also sells.

So, where do we stand with loan limits as of November 19, 2011? Here we go:

How Mortgage Limits Vary

There are several types of mortgage loan limits. Generally, most borrowers need to look at the limits for conventional, FHA and VA loans to see how much can be financed with the most-widely originated loans.

If you borrow at or below the conventional loan limit for non-government mortgages, you would have what is generally known as a “conforming” loan. If the amount borrowed is above the conventional loan limit, you would have a “jumbo” loan and face a higher rate because larger loans imply more risk to investors, the folks who buy mortgages.

As well, a “conventional” mortgage can be seen as loans originated from the private sector. FHA and VA mortgages are originated in the private sector but insured through government programs. For specifics, look at FHA and VA mortgage requirements.

Conventional Loans

As of October 1, 2011 the conventional loan limits depend on the county where you’re located. Instead of one national mortgage limit, loan limits depend on; one, whether the property is in a general or high cost area; two, whether the property is within the lower 48 states; and, three, whether the property located in Alaska, Hawaii, Guam and the U.S Virgin Islands.

In general terms, the October 2011 loan limits for a single-family home range from $417,000 to $625,500 in the 48 continental states. Once you know the loan limit for a single-family home in a specific area you can then see the limits for owner-occupied homes with two to four units.

VA Loans

After October 1, 2011 the Department of Veterans Affairs (VA) will use the same loan limits as before. There are no changes. As the VA explains:

“The maximum guaranty for VA guaranteed loans closed October 1, 2011 through December 31, 2011 will remain unchanged. The Veterans’ Benefits Improvement Act of 2008 provided a temporary increase in VA loan limits for loans closed January 1, 2009 through December 31, 2011. Because of this legislation, VA loan limits will remain the same for the remainder of the calendar year. Please note that VA does not have a maximum loan amount. Loan limit refers to the maximum loan a lender could make and still receive a 25% guaranty from VA, assuming the veteran has full entitlement.”

Official loan limits for specific areas range from $417,000 to as much as $1,094,625. To find the VA loan limit for a given area, please use the chart below:

2011 VA County Loan Limits for High-Cost Counties

Some important points about financing for vets, active-duty personnel, and members of the National Guard and Reserve:

• Qualified individuals can purchase homes with one to four units provided that they live in one unit. The veteran must certify as to occupancy.
• In the case of an active-duty veteran who cannot occupy because of his or her status as an active duty member of the armed forces, occupancy by the spouse can satisfy the occupancy requirement.
• Individuals on active duty have strong protections preventing foreclosure under the Servicemembers Civil Relief Act (SCRA).

FHA Loans

The FHA loan program has loan limits for owner-occupied homes under its 203(b) program, the most-common FHA option. The FHA loan limit varies according to whether you live in a typical real estate market, a “high cost” market or you reside in Alaska, Guam, Hawaii, and the Virgin Islands.

As of November 18, 2011 and through 2013 the FHA 203(b) loan limits look like this:

To qualify for the FHA loans above, at least one unit must be owner occupied.

HUD has an online database which shows the latest FHA loan limits by state and county. The system can be reached by going to the FHA Loan Limits Page

Also, HUD has a list of Areas at Ceilings and Above and Areas Between Floor and Ceiling.

FHA-Insured Reverse Mortgages

The loan limits for FHA-insured reverse mortgages (also known as home equity conversion mortgages or HECMs) will remain at $625,500. HUD, in 2010, introduced the HECM Saver program as an alternative to its standard HECM plan. The difference? The Saver program has an up-front insurance fee which is less than the cost of take-out food for four but the amount you can borrow against equity has been reduced. For specifics, speak with attorneys who specialize in elder law and fee-only financial planners.

A Brief History

Loan limits used to be set annually and the same limit applied to all states and all counties in the lower 48 states. The limits were 50 percent higher outside the countinental U.S.

The real estate marketplace began withdrawing from the highs seen in April 2007 and price reductions continued into 2008. Given lower home values, conventional loan limits were supposed to be reduced for 2009. At this point the government stepped in and changed the rules with the Economic Stimulus Act of 2008 (ESA) and the Housing and Economic Recovery Act of 2008 (HERA). These laws gave us the loan limit system we have in place today.

Until September 30, 2011, the Department of State, Foreign Operations, and Related Programs Appropriations Act extended the maximum loan limits first established in 2008.

On November 18, 2011 the President signed H.R. 2112: The Consolidated and Further Continuing Appropriations Act, 2012. This legislation increased the FHA loan limit.

A CAUTION: Because maximum loan limits can change at anytime, visitors to OurBroker.com are advised to speak with local real estate brokers and lenders BEFORE entering the real estate marketplace for the latest mortgage information.

Copyright 2011 OurBroker.com. All Rights Reserved

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The paper, written by Joseph Gyourko, a professor of real estate and finance at the Wharton School of Business at the University of Pennsylvania, says that while the FHA has not required a taxpayer bailout for more than 75 years it’s “highly likely” that public funds will now be needed.

The report, Is FHA the Next Housing Bailout? was commissioned by the conservative American Enterprise Institute. The study explains that the FHA is required to keep a reserve equal to 2 percent of its outstanding loans but that the federal program is now far below that level.

The FHA, says Gyourko, “presently is in violation of this capital guideline, as there were $879.875 billion in outstanding insured mortgage balances at the end of fiscal year 2010, so that the capital ratio was only 0.59% of outstanding insurance-in-force.”

What Professor Gyourko has documented is not the breakdown of the FHA but rather the failure to adequately regulate the mortgage marketplace. Let me explain why:

To start, the latest annual report from HUD says the FHA’s reserve — the Mutual Mortgage Insurance (MMI) Fund — could do better but it’s actually increasing in size.

“FHA’s total liquid assets (cash plus investments) grew by $800 million since last year, to $33.7 billion,” says the government. “That amount is $1.9 billion higher than at the end of FY 2009, and is also $7.7 billion higher than was predicted last year by the independent actuaries.”

Politics

The debate over the FHA’s financial status is curious. The Wall Street Journal shows the story under the category of “politics” and that’s right.

Something which is also right is the reaction of the Mortgage Bankers Association.

“It is clear,” says MBA Chairman Michael W. Young, “that the persistent troubles in the economy and real estate markets are continuing to impact FHA’s financial reserves, and given FHA’s mission of providing access to mortgage credit to lower income and first time homebuyers, it should be of little surprise that its reserves are being stressed.”

Housing Realities

In other words, it’s not the FHA program which is faulty, it’s the fact that the FHA program reflects the housing market.

The FHA insures mortgages. With FHA insurance borrowers can put down less money. In return for insurance the FHA charges a premium — generally 1 percent up front at closing and 1.15 percent annually on the unpaid balance. The mortgage insurance premium (MIP) paid by borrowers goes into a reserve — the Mutual Mortgage Insurance (MMI) Fund

When there’s a claim — when someone is foreclosed — the FHA pays off the lender. The money to make the payment comes from the reserve fund.

Today claims are larger than in the past for a very simple reason: Home values are falling. The government says home values nationwide are down 19.1 percent below the April 2007 peak and roughly the same as the February 2004 index level. If home values were steady or rising, claims would be far smaller and many could actually be paid off by simply selling the properties with no financial loss to the FHA reserve fund.

Why are home prices down? Because millions of “nontraditional” loans such as option ARMs were made by private-sector lenders, mortgages which were often originated with little or nothing down, no-doc loan applications and terms which assured that payments would soar. Meanwhile, the FHA, VA, credit unions and community banks kept their standards in place and did right by their borrowers and investors.

Further Steps

The FHA has taken several steps to better its financial position. It has gotten rid of seller-assisted down payments, raised the required down payment and changed the insurance premium schedule.

But the FHA can’t change a housing market which remains polluted with toxic mortgages, robo-signed foreclosure affidavits and electronically-traded mortgage notes which can’t be found. If it turns out that the FHA does need taxpayer help, it will be another example of collateral damage, a by-product of the vast mortgage scams which have undermined the housing market and the economy.

Despite the financial assault on borrowers and taxpayers it may well turn out that the FHA reserves will continue to increase.

“Barring a further significant downturn in home prices,” reports the government, “the MMI Fund will start to rebuild capital in 2012, and return to a level of two percent by 2014.”

Will The FHA Go Bankrupt? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The answer may be surprising.

In general terms there has been considerable support for lower FHA loan limits for several reasons.

First, lower FHA limits mean more opportunities to sell private-sector loans.

Second, the FHA has long been considered a program for entry-level and middle-income borrowers. Huge mortgage amounts suggest that the program has evolved into a financing vehicle for the upper class, something which doesn’t quite pass the sniff test for a program that evolved from the Great Depression.

Third, it’s thought that the FHA should not be making big loans because such financing is inherently more risky than smaller loans.

The first two items are matters of opinion and preference, but what about the third? Are big loans really so risky?

We asked HUD to provide the latest delinquency and foreclosure figures by loan amount. As of mid-September 2011 the results were probably not what most people expect.

Risk

If we’re going to discuss “risk” we must ask how the term should be defined. The best approach is to look at different stakeholders.

Borrowers: Bigger loans for borrowers are only “more” risky than smaller mortgages if financial qualifications are missing. If Smith can comfortably afford a bigger loan there’s no problem. If Jones has a small loan but can’t pay, then that’s a concern.

Lenders: Lenders love the FHA program for a very simple reason: The loans are 100% guaranteed by the FHA. If a loan goes bad the lender knows it will get back its principal as well as other costs. Thus, on the matter of risk, you would have to say lenders have little to none.

The FHA: For the FHA loan size is not really an issue as long as the borrower is properly qualified. It’s true that a $600,000 FHA mortgage is a bigger loan than a $100,000 mortgage, but it is also true that the FHA will collect a bigger up-front mortgage insurance premium and a larger amount in terms of the annual mortgage insurance premium (MIP). In effect, there’s a balance between size and insurance premiums.

Where matters get dicey is when things go wrong. You can objectively lose a lot more dollars with a big loan. The catch is that the threat of loss does not exist in a vacuum, you also have to also look at marketplace results.

In other words, what’s the failure rate for FHA loans by mortgage size and what percentage of the FHA loan portfolio is represented by loans of a given size?

Real Numbers

A look at the chart shows that big loans are not a big deal in terms of FHA risk for two reasons:

First, big loans are a tiny percent of the overall FHA portfolio. Loans for $500,000 or more are just .75 percent of all FHA mortgages outstanding.

Second, few big loans fail. Only 1.32 percent of all loans above $500,000 have been foreclosed, compared with an overall average of 2.47 percent.

You see the same thing with bankruptcies: The percent of FHA borrowers in bankruptcy is 1.22 percent. The percent of big borrowers in bankruptcy is just .27 percent, about one-fourth the rate of other borrowers.

Why are there relatively so few foreclosed borrowers with big FHA loans? Most probably the answer is that borrowers with big loans have big incomes and presumably better savings and more assets than entry-level borrowers.

One question raised by the FHA figures is this: If big loans represent relatively little risk then why do lenders charge higher mortgage rates for “jumbo” mortgage products? Combine big loans with above-market rates and below-market risk and lenders have a sweet deal.

Are Big FHA Mortgages Really Risky? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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