Monday, April 14, 2008

FHA Reserves, Required or Not??

Michelle and her husband are from Texas and had been approved for an FHA loan on a single family residence. Their lender had told them that they needed two months reserves in the bank at closing or the loan would not close. They were confused by this requirement and came to me for clarification.

Well, I was confused too! FHA does not have a requirement for reserves (unlike conventional loans). The only reserve requirements with FHA are if a buyer is purchasing a 3-4 family unit. If purchasing a 3-4 unit, the reserves required are three months.

The answer here was a no-brain-er and is actually available on the HUD website. There is however, a really big issue here. Can you see it? Bear with me, here is another example.

Another couple was approved for an FHA loan in March of 08 and the company they were working with said the couple had to pay their 2007 taxes before the lender would close the loan. Hello, 2007 taxes aren't due until April 2008. This couple asked if there was a law stating this. Well, NO! There is not even an underwriting guideline that calls for it.

What is going on here? Do you see the big issue yet?

I have a web site where I answer Mortgage questions from home buyers, sellers, real estate agents, loan officers, and yes, even underwriters. These underwriters and loan officers are from some well know companies. This isn't about my web site, ... I'm not even going to give you the URL. I only bring it up because that is why I see a big picture that others can not. I get questions every day from all over our country, India, and other countries in the middle east.

I see at least four major issues with this information so far but I'm only going to cover two.

First, Why don't Loan Officers and Underwriters know basic FHA underwriting guidelines? Simple, they have no experience or training on FHA! FHA loans are and always have been a terrific option for people that didn't quite fit into conventional guidelines. Best of all the interest rate is considerably lower compared to a sub-prime loan and as I write this today FHA rates are equal to par on a Fannie Mae. It doesn't get any better than that, right?

Well, FHA loans are fairly complicated to put together and they use to have stringent appraisal and inspection requirements. So, if a borrower didn't fit into Fannie or Freddie it was easier and quicker to slap them into a sub-prime. It was a slam dunk and so what if the rates were higher on a sub-prime, few consumers understood their options anyway. (that mentality is why I built my site in 2002)

Another reason companies didn't do FHA loans was because they had to be HUD approved which meant they had to have a minimum net worth and pass a costly Audit every year. So again, why bother when sub-prime was so easy and available.

Now, of course the sub-prime days are almost a thing of the past or at least not as "sub" as they use to be. The savior? ... FHA Loans of course, except that very few, including underwriters have any experience with them or understand the differences between FHA and Fannie. Thus, in the two examples above, underwriters and LOs are just making stuff up or worse case, running scared because of all the flack in the industry right now.

In defense of the underwriter (as in example two) I will say that they have the authority to require what ever they deem necessary to improve a portfolio. Many of the questions I have received from underwriters seem to reveal that it is really a case of inexperience and over caution.

The mortgage industry professionals are struggling to catch up/learn FHA guidelines. If you are a consumer you must be very careful to find someone that has been HUD approved for at least two years. And Do Check, seriously. Some companies are doing FHA loans and they are not HUD approved. They are under the disillusionment that HUD will allow a non-HUD approved broker, to broker, to another HUD approved broker! Sounds a little flaky, no?

How in the world did we ever get in this mess? We can throw some of the blame to the politicians and presidential candidates that are hyping it up for their own agenda. It is not as bad as they say but they are speaking so loudly that the rest of the world is now listening. Did you read what is going on in the UK's market today? Good grief.

I don't believe in bailing out our large lending companies and here is why. Back in this article I mentioned getting questions from India and other countries in Asia. Now I ask myself, why would a mortgage underwriter in India, who I can hardly understand due to "no speaking good English", be calling me on the telephone at 3:00am about a loan in Texas??

Go Figure!

1 comment:

  1. Wow, great post I thought it was just me trying to figure out and keep up with the fall out of the sub prime loans. The lenders encourage the market and when it fell, they blame the LO's and consumers like a kid who threw a rock and hid his hands. Thank you for your explaination

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