Sunday, June 03, 2007

FHA loans to the Rescue!

The subprime mess could have gone FHA was what Lew Ranieri suggested back in April.

Not surprising the passage of the Federal Housing Finance Reform Act of 2007 and subsequent praise from industry groups NAR and the Mortgage Bankers Association. Bank of America's FHA executive was quoted on MarketWatch that market forces have created "the perfect storm" for FHA reform.

What does FHA reform mean?

Unrealistic loan limits have put FHA financing out of reach for millions of US homeowners who live in higher-cost areas, thus limiting the use of the product to lower cost areas of the country. This bill could change things dramatically, if, as it suggests, the conforming loan limit will be adjusted regionally. FHA's mortgage limits are set by county and are tied to increases in the conforming loan limits established by Freddie Mac (in accordance with Section 203 (b) (2) (A) of the National Housing Act, as amended (12 U.S.C 1709).

Translation: Where families stretched to afford a home in California and New York by misusing subprime and option ARM products, the hope is that FHA products will fill the void and help consumers who are stuck with refinance options and new home buyers with the safer programs but similar benefits. For example with a 3% down payment, FHA's 1-year ARM and 3-year hybrid ARM have annual caps of one percentage point, and life-of-the-loan caps of five percentage points.

Accessiblity via the Internet: FHA programs have never been especially embraced over the the internet :
1. HUD requires an originator have a physical office within each of its lending regions. This knocks out most mortgage companies from lending nationally.
2. FHA loans are more work and require more cooperation from borrowers: Converting an internet lead into a customer is difficult enough, obtaining the cooperation and trust to collect more documentation and jump through more hoops makes it really daunting.

A New Approach:
The Ameriquest days are long over. Smart lead generators will prepare to market this program, and find ways to make distribution of leads to small local mortgage companies economic. Lenders, if they are not already, will get themselves HUD approved, and customers will find themselves ultimately with a better loan - despite the fact that they had to do some extra paperwork for it.