The Mortgage Guru

FHA Mortgages

With FHA attempting to assist with the housing crisis some homeowners are facing I have been receiving numerous questions from clients in regards to FHA loans, how they work and what the new guidelines and loan limit increases mean to them personally. I will attempt to shed some light on the subject and hopefully make your life a bit easier…

From HUD:

Nearly a quarter of a million more families could be eligible this year to purchase or refinance their homes using affordable, FHA-insured mortgages, thanks to the economic growth package signed into law by President Bush last month. The Economic Stimulus Act of 2008 will allow HUD’s Federal Housing Administration (FHA) to temporarily increase its loan limits and insure larger mortgages at a more affordable price in high cost areas of the country.

“The stimulus is providing immediate relief to homeowners,” said HUD Secretary Alphonso Jackson at a Greater Las Vegas Association of Realtors keynote speech. “It raises the Federal Housing Administration’s loan limits, enabling more families to qualify for a safe, affordable FHA mortgage. This is important. Families in high-cost states have been priced out of FHA-backed loans. This has created a vacuum, filled by exotic subprime loans. Families with home loans up to $729,750 will now qualify for an FHA loan, depending on where they live.”

Beginning today, HUD will offer temporary FHA loan limits that will range from $271,050 to $729,750. Overall, the change in loan limits will help provide economic stability to America’s communities and give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative. The maximum amount of $729,750 will only be applicable to extremely high-cost metropolitan areas such as: New York, Los Angeles, San Francisco and Washington, D.C. HUD also calculated new limits for loans to be purchased by Government-Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac.

“Many families all over the U.S. will benefit from this access to credit, and increasing these loan limits will inject much-needed liquidity into the housing market,” said FHA Commissioner/Assistant Secretary for Housing Brian Montgomery. “Even moderate-cost areas like those in the South and Southwest such as Dallas, Houston, Augusta and Tallahassee will be helped, with most loan limits there rising to $271,050.”

There are 75 areas in the U.S., out of a total of approximately 3200, that will be eligible for the highest loan limit of $729,750. Previously, FHA’s loan limits in these very high-cost areas were capped at $362,790.

The Economic Stimulus Act of 2008 permits FHA to insure loans on amounts up to 125 percent of the area median house price, when that amount is between the national minimum ($271,050) and maximum ($729,750). The new minimum and maximum loan limits are based on 65 percent and 175 percent of the conforming loan limits for Government-Sponsored Enterprises in 2008, which is $417,000. The FHA used a combination of existing government data sets and available commercial information to determine the median sales price for each area, and released the data approximately two weeks after the President signed the stimulus bill. The change in loan limits are applicable to all FHA-insured mortgage loans endorsed after HUD publishes the increased loan limits today, and it lasts until December 31, 2008.

By increasing loan limits nationwide, FHA will provide much needed liquidity and stability to housing markets across the country. Already, as conventional sources of mortgage credit have been contracting, FHA has been filling the void. From September to December 2007, FHA facilitated more than $38 billion of much-needed mortgage activity in the housing market, more than $15 billion of which was through FHASecure, FHA’s refinancing product. By focusing on 30-year fixed rate mortgages, FHA helps homeowners avoid and escape the risks associated exotic subprime mortgage products, which have resulted in rising default and foreclosure rates.

In January 2009, FHA’s maximum loan limit will return to $362,790, unless the U.S. Congress approves bipartisan legislation to permanently increase loan limits as part of the FHA Modernization bill, which is still awaiting final approval on Capitol Hill.

“In January 2009 the loan limits will return to their previous setting,” Jackson said. “We need a more permanent solution. So our next step must be to modernize the 74-year-old FHA. Two years ago, before the downturn, we introduced an FHA modernization bill to Congress. Our plan offers flexible down payment requirements and higher loan limits. It would also enable the FHA to fairly price premiums, taking risk into account so the market makes rational decisions. We don’t want anyone caught by surprise again. FHA modernization could help a quarter of a million families this year alone. It passed the House and Senate in overwhelmingly bipartisan fashion. But a final bill has yet to reach the President. Congress must act-now!”

Jackson noted that the Administration could not wait for Congress to act. “Last August, the President and I introduced FHASecure. It helps responsible families who, having paid their bills on-time under the original interest rate, find themselves falling behind under the reset rate. For the first time, these delinquent families would be able to qualify for an FHA loan. ‘Underwater’ borrowers and those in the process of foreclosure may also qualify.” Since August, FHA has helped 110,000 homeowners who were current or past due on their loans refinance with an additional 200,000 expected by year’s end.

Jackson also discussed the Administration’s efforts with the Hope Now Alliance, and industry-led effort that has been reaching out to borrowers in trouble. Hope Now members have contacted over a half million homeowners. Their hotline now receives more than 4,500 calls a day. Industry has modified 1 million loans since the second half of last year, keeping homeowners in their homes.

“We can create the conditions for recovery,” Jackson said. “We can make the boom-bust cycle shorter and shallower. We can replace gimmicks and shortcuts with transparency and honesty. And we can take the necessary steps to prevent foreclosure. That’s right, foreclosure is not inevitable, it’s preventable. And we have the tools to prevent it.”

Discussing recent efforts in Congress to bail out lenders, which the Administration opposes, Jackson said” Americans are a fair people. They want to help. But they understand that the answer to an economic challenge must ultimately come from the people who drive the economy. They want the tools of recovery in their own hands. And they do not want to kill the spirit of opportunity that made this country great.”

FHA loan limits are based on the county in which the property is located. However, for properties located in metropolitan or micropolitan statistical areas, the limit is set at that of the county with the highest limit within the metropolitan or micropolitan area.

Hopefully this will help answer your FHA concerns; if not, as always, you can contact me direct at 702.526.3133 or mgarnes@garnesmortgage.com if you have more personalized questions and I will be more than happy to assist you.  And in case you were wondering the FHA loan limit for Clark county Nevada has risen to $400,000

See below for the daily market commentary:

Monday: 03/17/08 10:30 AM EDT: Treasuries are up on news of action by the Federal Reserve yesterday and the release of largely bond-friendly economic new this morning. Stocks opened lower but losses have been contained and the indices have been heading back toward unchanged.

The initial guidance for the markets was word that the Federal Reserve, through its Federal Open Market Committee (FOMC) decided yesterday to lower the discount rate (the rate charged to banks for loans directly from the Fed) by 0.25% from 3.50% to 3.25%. It is now just 0.25% above the Fed’s target for the fed funds rate, the rate banks charge each other for overnight loans necessary for the maintenance of daily reserve requirements.

In addition, the FOMC created a temporary (though extendable), short-term lending channel to primary securities dealers in order to shore up the credit market. The action came shortly after an announcement that JPMorgan Chase was buying Bear Stearns. The Fed move came just two days before the committee’s regularly scheduled policy meeting. (FED ANNOUNCEMENT)

Foreign stock markets plummeted on the news since it sparked a new round of fears that the credit market is crumbling. But U.S. stock traders have not been as skittish so far today, though the financial sector has been hit hard. The Fed action was dramatic but it also shows that the central bank will do whatever is required to prevent a meltdown in the financial markets.

Another support for stocks this morning is a major retreat in oil futures. In recent trade, the price of a barrel of light, sweet crude for April delivery was down by $3.63 to $106.58.

The economic news of the day was basically bearish, which keeps downward pressure on interest rates. The New York branch of the Federal Reserve reported that its index of the region’s manufacturing activity came in at -22.23 this month following a reading of -11.7 in February. Any reading below 0.0 indicates a general contraction of activity relative to the preceding month. Not only was the latest index much worse than the -5.5 that forecasters were calling for, but it was the weakest reading in the history of the data series going back to July of 2001.

More bearish news came when the Federal Reserve reported that industrial production — a gauge of output from the nation’s factories, mines, and utilities — fell last month by 0.5%. This was a larger contraction than the 0.1% that analysts had predicted. Output grew by just 0.1% in January.

While a portion of February’s decline was due to a 3.7% drop in the production index for the volatile utilities category, today’s report indicated that the large category of manufacturing saw a decline of 0.2% following a flat reading (0.0%) in January.

A plus for both stocks and bonds was a sharp drop in capacity utilization, the ratio of output to potential output. It came in at 80.9%, the lowest reading since November of 2005. Significantly, the ratio fell to 79.3% in the manufacturing sector, the lowest reading since October of 2005. The low figures mean there is more slack in the production process and a reduced threat of bottlenecks that drive up prices.

In other news, the Commerce Department said that the current account posted a deficit of $172.9 billion in the fourth quarter of last year. The current account balance is the difference between dollars leaving and entering the country and includes investment income and unilateral transfers (foreign aid and government pensions sent abroad) so the report is more comprehensive than the monthly reports on international trade of goods and services.

The fourth quarter gap was much narrower than the $185.0 billion that had been projected by forecasters. In addition, the initially reported third quarter deficit of $178.5 billion was revised down to $177.4 billion, though the figures for the first and second quarter were revised to show larger deficits.

The economic calendar for the remainder of the week is relatively light but there are only three trading days after today since the markets will be closed on Friday.

Tomorrow, the Producer Price Index (PPI), a gauge of inflation at the wholesale level, will be released. Though a key inflation indicator, its influence will be diminished by the fact that the more significant Consumer Price Index has already been released.

In the last report, the Labor Department said the PPI rose in January by 1.0% following a 0.3% decline in December. In November, the index surged by 2.6% but this was due primarily to an 11.4% jump in energy prices — the largest in almost eighteen years. Energy prices fell by 3.0% in December and rebounded by 1.5% in January. The index for food prices slipped by 0.2% in November but rose in December by 1.4% and in January by 1.7%.

The core index (ex-food and energy) was up by 0.4% in January, the biggest jump in eleven months. Moreover, on a year-over-year basis, the PPI was up by 7.4%, the largest rise since October of 1981. The core index was up by 2.3% Y/Y following 2.0% increases in November and December.

A tamer report is expected for February. The estimate for the PPI is an increase of 0.3%. The core index is predicted to have risen by 0.2%

The report on housing starts for last month also comes out tomorrow morning. In the last report, the Commerce Department said the seasonally adjusted, annualized rate of new home starts edged up in January by 0.8% to 1.012 million. Though an improvement, it followed a two-month decline of 21.2% which left December’s 1.004 million the lowest since May of 1991. January’s reading was the second lowest since then.

A sign of further weakness was a 3.0% drop in the rate of building permit issuance to 1.048 million (seasonally adjusted, annualized). Though this was subsequently revised up to 1.061 million, it was still an eighth consecutive decline and the lowest level since March of 1993.

The starts pace is expected to have declined in February by 1.7% to 995,000. This would be the lowest rate since March of 1991. The rate of permit issuance is expected to have declined by 3.9% to 1.020 million, which would be the lowest since November of 1991.

But tomorrow’s news will be eclipsed by the results of the FOMC policy meeting. The meeting statement will be released at approximately 2:15 PM Eastern Time.

The Fed has already reduced the fed funds rate by 2.25% since last September and reduced the discount rate by 3.00% since last August. In addition, in December, the Fed instituted a Term Auction Facility (TAF), another means by which banks could obtain needed reserves. And, of course, it recently established a Term Securities Lending Facility (TSLF) and a Primary Dealer Credit Facility (PDCF), in order to provide funds to investment institutions.

However, economic data continues to paint a bleak picture. Mortgage foreclosure activity is at record high levels and nonfarm payrolls are shrinking. Statistics on both the manufacturing and services sectors have indicated recent contractions of activity. And financial institutions continue to disclose larger than predicted losses.

For these reasons, Fed watchers are anticipating another round of cuts tomorrow. The main question is how deep will the cuts be. Besides the extent of the expected cuts, traders will also look closely at the policy statement for any hints of what the Fed might do at the next meeting at the end of April.

There are no major releases on Wednesday so the markets will continue to react to the results of the Fed meeting. A couple of minor reports may offer guidance. The Mortgage Banker’s Association of America will release its application index data for last week but the news is likely to get less attention than the weekly oil inventories report.

On Thursday, the jobless claims report will direct attention to the employment situation once again. In last Thursday’s report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits were unchanged in the previous week at 353,000.

The reading was more bullish than expected since it followed a decline of 21,000 the week before — which had led forecasters to predict a partial rebound in the latest figure. The four-week moving average, which smoothes out some of the short-term volatility, fell by just 1,250 to 358,500.

Despite the lack of movement in the latest initial claims numbers, levels remain elevated. For the year to date, the average weekly reading has been 345,500. For all of 2007 it was 322,135.

The report said that the level of continuing claims rose by 7,000 to 2.835 million in the week ending March 1 (continuing claims must be at least a week old). This was the highest reading since September of 2005. The four-week average rose by 24,500 to 2,812,750, the highest reading since October of 2005. The average weekly reading for the year to date is 2,766,000. For all of 2007 it was 2,551,231.

Once again, a moderate increase is anticipated in last week’s initial claims figure.

Later on Thursday, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators for last month. In January, the index fell by 0.1%. This was a fourth consecutive contraction, suggesting that the economy is or will soon be contracting rather than growing. Another contraction of about 0.3% is expected for last month’s index.

The last major economic release of the week also comes out on Thursday morning. This is the regional index on manufacturing from the Philadelphia branch of the Federal Reserve. The index came in at -24.0 in February following a -20.9 reading in January and a -1.6 reading in December.

Like the New York index, any reading below 0.0 indicates a contraction of activity. The latest declines mark the first three-month contraction since early 2003 and February’s reading was the lowest since February of 2001. Another contraction reading of about -19.0 is predicted for this month’s index.

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