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Life as an FHA borrower is getting tougher.

In an effort to shore up its flailing balance sheet and dwindling capital reserves, the Federal Housing Authority is rolling out sweeping financial changes. FHA borrowers have to look better on paper and be better credit risks.

Mortgage insurance premiums are rising, too.

Changes Effective April 5, 2010

In its official announcement, the FHA said its trying to better position itself to "manage its risk while continuing to support the nation’s housing market".

The changes are effective with case numbers assigned starting April 5, 2010.

One widely speculated change wasn't made -- the increase of the FHA minimum downpayment.  Homebuyers in Cincinnati, Chicago and elsewhere can still buy with just 3.5 percent down.  However, the group did roll out a number of other changes, including:

• An increase in Upfront MIP from 1.75 percent to 2.25 percent
• A reduction in maximum seller contributions from 6 percent to 3 percent
• A Congressional request to increase monthly mortgage insurance premiums

Furthermore, the FHA's new guidelines institute a minimum FICO requirement of 580 to make the minimum 3.5% downpayment, requiring 10 percent for any applicant whose credit score falls below that level.

2010: The Year Of Investor Overlays

But, just because the FHA allows 580 FICOs, banks don't have to allow it.

The official term here is "investor overlay". It's when that banks use Federal Housing Authority guidelines as a starting point for their own set of underwriting rules which are often more strict.

And banks have a good reason for making investor overlays.

In January, the FHA subpoenaed 15 lenders -- including the well-respected 1st Advantage Mortgage in Lombard, Illinois -- because of abnormally-high FHA default rates.  The act was a shot across the bow, it appears, because more lenders have been shut down since.

The FHA made a loan performance benchmark and if a  bank's defaults exceed the mean by x number of sigmas, said bank loses its FHA license. Period.

Expect FHA investor overlays to be a running theme of 2010.

A Mortgage Denial May Not Be Permanent

Guidelines will vary from bank-to-bank as lenders take a more active role in managing their originated mortgages.  What gets FHA-approved Bank of America, for example, may not be FHA-approved at Wells Fargo.

Many FHA loans will be denied in 2010 simply because the applicant applied at the wrong bank.

If your mortgage has been denied or you just want to have the best chance of being approved possible, call or with some notes on your situation. I work for Waterstone Mortgage -- a HUD-approved lender.  We underwrite and fund FHA mortgages from our own accounts, and work with the nation's largest investors as an approved conduit.

In other words, apply once and you'll be automatically aligned with the bank with the best pricing plus least amount of overlays. That's what I do for you as your loan officer.

Mortgage guidelines are in constant flux.  Or at least it seems that way.  And too often, rumors of "what's coming" take on a life of their own, spilling over into media coverage and into the minds of the homebuying public.

A classic example of this was the fabled "$15,000 homebuyer tax credit" from 2008.  It was an idea that passed the Senate and got good headlines but, ultimately, died in Congress.  Not before the news went mainstream, however.

The most recent rumor involves FHA mortgage insurance premiums.

The image above is a snippet from page 348 of the Special Topics sub-section in the Budget of the United States Government, Fiscal Year 2011.  Among other things, the text recaps the FHA's recent response to its own dwindling reserves and rising risk levels.

The FHA's new guidelines effective April 5, 2010 are highlighted, too.

Now, when the FHA passed its new guidelines (13 days ago), it said that it would petition Congress for the right to raise its mortgage insurance premiums because, by statute, the FHA doesn't have that authority.  According to the highlighted text, the FHA wants to make two changes:

1. Lower the Upfront Mortgage Insurance Premium from 2.250% to 1.000%
2. Raise the Monthly Mortgage Insurance Premium to 0.85% on most mortgages

This is where the rumors starts.  Just because the FHA asks for control over its own mortgage insurance doesn't mean that Congress will grant it. Nor does it mean that the FHA won't deviate from its original plan should Congress accede to the FHA's request.

In other words, the MIP changes are just a wish list. Reality is much different.

For now, starting April 5, 2010, the FHA increases its upfront mortgage insurance premiums to 2.25%, raises its minimum FICO score requirements to 620, and reduces its allowable seller concessions to 3 percent.

These are the facts. Homebuyers, loan officers and real estate agents should plan accordingly.

If you're buying a home and thinking of going FHA, be sure to talk to your loan officer about your personal timeline and how the new FHA guidelines may affect you.  Or, if you don't have a loan officer, and we can talk about your situation.  My bank underwrites FHA-backed mortgage in-house and our rates are low.

Plus, I love to work with my readers.

(Image Courtesy: WhiteHouse.gov; h/t Holden Lewis)

Want to refinance on the FHA Streamline Refi program? Better get your application in-process pronto.

There are 4 days left to apply for an FHA Streamline Refi under the "old rules".  Starting November 17, the FHA changes its underwriting guidelines for the popular FHA-to-FHA refinance program.

Getting approved for a Streamline Refi will be more difficult and more expensive.

Summarizing the official FHA announcement, there are 3 areas in which the Streamline Refinance program is tightening.

1. FHA homeowners must now be employed at the time of application
2. FHA homeowners must now verify household income
3. FHA homeowners must now have their homes appraised in order to "roll in" closing costs to the refinance

Compared to the current Streamline Refi guidelines, it's a landscape shifter.

See, until now, the FHA's refinance philosophy has been to help its homeowners however possible.  It didn't matter whether a person was out of work, or whether he had his hours reduced, or even whether his home had lost 50% of its value.  The FHA was all about lowering payments for its people.

So long as the homeowner had been paying the mortgage on-time, the FHA would just do the refinance -- few questions asked.

Effective next month, this changes.  Underwriters for the new FHA Streamline Refinance program will be instructed to deny applications on the basis of employment, income, and assets.

No job?  No money?  No FHA loan. Under current guidelines, this isn't the case.

Furthermore, because (1) homeowners won't be able to roll in their closing costs without appraisal and (2) loan-to-values will be limited, people in highly-depreciated areas like Florida and Arizona may find streamline refis suddenly cost-prohibitive.

It's a terrible situation for the FHA homeowners that don't hear about these changes until it's too late.

Therefore, here's what to do. If you've got a FHA mortgage and you've been paying on-time, get yourself a streamline refinance quote against today's set of guidelines. Don't worry about the costs or by how much you'll lower your rate just yet -- the important part is just to get a non-obligation quote.

For the unemployed and furloughed, it's especially important.

Then, when you have the rate offer in hand, compare the new numbers against your current payment.  I find that people are usually surprised by how much they save when their mortgage rate falls by even just a little.

To get a rate quote, call your lender's customer service number, or, if you prefer to work with "humans", with the details of your mortgage and what you're hoping to do. I answer my own emails and will get back with you right away.  I really like working with my readers, besides.

And, lastly, remember this.  As of November 17, existing, bona fide streamline applications will be grandfathered in to the old underwriting rules. It doesn't matter when you close, per se.  It only matters when you apply.  So get that application going.

The last thing you'll want to do here is wait too long to streamline.  With just 1 week to go, the clock is ticking.

FHA mortgage rates are lower than conventional mortgage rates right now.

It's an interesting development, especially for homeowners and home buyers with low equity.

Unless you've got 20 percent into a property, if you're locking a 30-year fixed rate mortgage, there's compelling reasons to go FHA.

The first reason to choose FHA is an obvious one -- mortgage rates are lower. Right now, there's 1/8 percent difference between the comparable FHA and conventional 30-year fixed products and, over 30 years on a mortgage, that can really add up.

The second reason why FHA may be better than conventional right now is that FHA mortgage insurance premiums are lower versus the private insurance offered through Fannie or Freddie.

On a 10-percent-down home loan for applicants with A-plus credentials, FHA insurance ends up being cheaper by 0.34% per year.

Assuming a $200,000 mortgage, that's $680 per year and for people with FICOs under 740, the savings get substantially bigger. Find out your credit score for free from CreditReport.com if you don't know it already.

Despite these two reasons, however, when it comes to mortgages, we have to remember that it's not always about rate.  Costs matter, too.  FHA mortgages may be cheaper than conventional loans on an on-going basis, but they're rarely cheaper at the outset.

This is because FHA mortgage carry mandatory, up-front closing costs.  On streamline refis, the fee is 1.5 percent FHA fee; on purchase and regular refis, it's 1.75 percent; on "delinquent" mortgages, it's 3.0 percent.

Homeowners torn between FHA and conventional may find FHA "rate-attractive" but cost-prohibitive.  The math will vary from home-to-home, and homeowner-to-homeowner. Given the FHA's low rates, however, the program at least warrants some consideration.

To see how the math compares on your home, or pending home purchase, call or with the details of your situation. We'll see how the math works out best for you.

Private Mortgage Insurance is an insurance policy that is paid by homeowners for the benefit of lenders.

It's required for all conventional-mortgage homeowners whose loans exceed 80% loan-to-value.

Similar to homeowners insurance, private mortgage insurance gets "cashed in" when a loss occurs. In the case of the former, the loss may be storm damage; the latter, mortgage default.

With foreclosures proliferating, PMI defaults are up 26 percent over last year and double the levels from 2007.  Private mortgage insurers are paying out on many more claims than was expected and, as a result, are booking huge losses.

Homeowners are about to pay the price. To shore up balance sheets and protect against future losses, mortgage insurers have raised insurance rates and toughened underwriting guidelines.

Some of the changes we're seeing include:

• Minimum FICO requirements of 720 based on loan-t0-value
• Maximum debt-to-income ratios of 41%, regardless of Fannie Mae approval
• Loan size limitations, based on the health of the local real estate market

And, of course, insurance premiums are increasing for everyone.

It's a 2-pronged attack that will make a less-than-20%-downpayment more costly for Fannie Mae- and Freddie Mac-backed mortgage.

The alternative is to look to the FHA for a mortgage.  There's 2 advantages here.

First, as compared to PMI rates, FHA mortgage insurance looks cheap.  A $200,000 FHA home loan with 10% down can save as much as $400 in insurance costs.  With 5% down, that number grows to $1,040 per year.

Second, with FHA mortgage rates running neck-and-neck with conventional ones, there's a lot of days when 30-year fixed mortgage rates are cheaper in the FHA market versus the conventional one.

The downside of FHA is that the government puts up to 1.750 percent insurance fee into your loan at the time of closing.  It's a cost that doesn't exist in the conventional world and, for some people, the fee makes FHA an imperfect fit.

The key is to talk with your loan officer about Conventional and FHA mortgages to make sure you're making the right choice.

For help with your FHA vs Conventional decision, anytime with the details of your situation.  I answer all of my own emails and am happy to help you with what I know.

Plus, my rates are really good.

The FHA is changing its FHA Streamline Refinance rules.

Effective November 17, 2009, getting approved for the popular FHA-to-FHA refinance program will be decidedly more difficult.

And make note -- this is not speculation.

The FHA titled its official September 18, 2009 statement "Revised Streamline Refinance Transactions".  The document reads like a warning shot.

This is just the first in a series of changes coming from the FHA.

Summarizing the announcement, there are 3 areas in which the FHA is toughening up.

1. FHA homeowners must now be employed at the time of application
2. FHA homeowners must now verify cash needed at closing
3. FHA homeowners must now commission a full appraisal in order to add "roll in" closing costs to the refinance

Versus the current FHA Streamline Refinance guidelines, this is kind of a big deal.

See, until now, the FHA's prevailing refi approach was to help its homeowners to lower payments however possible.  The group already insured the mortgage so it didn't care whether you were out of work or if your home had lost value.  By helping homeowners to lower their monthly mortgage payment, the FHA was also lowering its overall credit risk.

Effective November 17, 2009, this will change.

Starting next year, the FHA will start to deny streamline refinance requests on the basis of employment, income, assets, and appraised value.  You can be sure a lot of today's credit-approved homeowners will be wishing they acted sooner.

I'll say this: If you've got a FHA mortgage -- just for the heck of it -- research your streamline refi options against today's guidelines. You never know what'll turn up.

Call your lender's customer service number, or with the details of your mortgage.  I answer my own emails and will get you the information you need.

The last thing you'll want to do is wait too long to act.

August 4, 2009, the federal government shutdown Taylor, Bean, & Whitaker's FHA lending operations.

And while the press is breaking stories about the company, its executives, and its business dealings, the biggest story as yet untold is the impact of Taylor Bean's shutdown on everyday American homeowners.

Taylor Bean was the 3rd-largest issuer of FHA home loans,  funding $17 billion in the first six months of 2009.  Assuming an average FHA loan size of $185,000, that's 3,800 loans funded per week.

So, if we account for TBW's 60-day turn-times in underwriting, the math tells us there's at least 30 thousand people who are suddenly without financing -- some of whom expected to buy a new home today.

Taylor Bean's shutdown has spawned a lot of questions from affected FHA borrowers.  Here's some of the more common ones.

I pay my mortgage to Taylor, Bean, & Whitaker each month. What do I do now?

Until you hear differently from TBW, or an authorized agent of TBW, continue making your mortgage payments as agreed.  Send them to the same mailing address to which you've always sent them.  Just because your mortgage servicer is shut down from lending FHA doesn't mean that your mortgage contract is null and void.

How do I know if my FHA mortgage application was being underwritten by Taylor, Bean, & Whitaker?

If you're unsure whether Taylor Bean was underwriting your FHA mortgage, talk to your loan officer about it.  Or, think back to the beginning of the approval process; you likely received a stack of disclosure documents from the "end lender".  If those papers were branded by TBW, your FHA mortgage was with Taylor Bean.

Do you have a copy of the official Taylor, Bean, & Whitaker company statement that it's shutting down its FHA business?

Yes.  Here's the Taylor Bean Whitaker Press Release discussing the shutdown.

I have a FHA 203k refinance in-process with Taylor, Bean, & Whitaker. I'm in the middle of construction and my contractor needs to get paid.  What do I do now?

According to an internal TBW email, Taylor, Bean, & Whitaker is in the process of moving its 203k portfolio to Bank of America and that process is estimated to take 3 weeks or longer.  TBW's access to all escrow funds is suspended. After the escrow fund transfers are completed, in theory, disbursements should resume as planned.  Expect an official communication from Bank of America via mail.

Will my FHA Streamline Refinance with Taylor, Bean, & Whitaker close? It's in-process.

No, Taylor Bean is no longer funding FHA mortgages.  Your FHA Streamline Refinance will not close with TBW.  If you want to do an FHA Streamline Refinance on your home, you'll have to start the refinance process over.

My Taylor, Bean, & Whitaker FHA mortgage was already scheduled for a closing.  Am I still closing?

No, Taylor Bean is no longer funding FHA mortgages.  Consider your FHA mortgage application "dead".  If you want to close on an FHA mortgage of any type -- purchase or refinance -- you'll have to start the refinance process over.

I am buying a house and have a FHA approval from Taylor, Bean, & Whitaker. Will it be honored?

No, Taylor Bean is no longer funding FHA mortgages.  If your loan officer hasn't done it already, notify your real estate agent and every other interested party about what's going on.  The Taylor Bean shutdown has been widely publicized.  Your seller won't be happy about the situation, but they won't be able to say it's your fault, either.  The next step is to start a new FHA mortgage application with a new FHA lender.  If your loan officer can't help, try .

I am buying a home and my Taylor, Bean, & Whitaker FHA mortgage was cleared-to-close.  Will my mortgage fund on time?

No, Taylor Bean is no longer funding FHA mortgages.  Even though you were cleared-to-close, the government is forbidding TBW from sending funds to your closing.  If you want to use FHA financing for your purchase, talk to your loan officer about finding a new FHA funding source, or try .

I closed on a FHA refinance with Taylor, Bean, & Whitaker last week.  The loan was scheduled to fund this week, but then the government shut down TBW.  Will my loan still fund?

No, Taylor Bean is no longer funding FHA mortgages.  Even though your loan was "closed", it doesn't fund until the 3-Day Right of Rescission is over.  Therefore, if you signed your refinance paperwork with an escrow agent July 31, August 3, or August 4, 2009, your refinance will not fund with TBW.  If you signed your paperwork on Thursday, July 30, your odds of the loan actually funding were small.  If it didn't fund and you still want an FHA mortgage, you'll have to start the FHA mortgage approval process over.  Talk to your loan officer about what's next.

I went to my FHA purchase closing  on Wednesday, right as the Feds were raiding Taylor, Bean, & Whitaker's offices.  I signed all of my paperwork but my loan didn't fund.  When will the funds get to my closing so I can finally close on my house?

The funds will not arrive for your closing.  TBW is no longer funding FHA mortgages.  All parties in the transaction should be made aware of your financing situation as soon as possible.  talk to your loan officer about finding a new FHA funding source, or try .

Can't another lender just "assume" my in-process Taylor, Bean, & Whitaker FHA mortgage approval? No. FHA mortgage approvals are not assumable.  If you move your FHA home loan to a different lender, expect to restart your mortgage approval from the beginning including the signing of new disclosures and the providing of current income and asset documentation.

If Taylor, Bean, & Whitaker is no longer making FHA mortgages, who is? There are lots of lenders still doing FHA home loans.  Taylor Bean was among of the largest, but there are other players, too.  The FHA market is alive and well.

Is it true that that the government will conditionally reverse its decision so that Taylor, Bean, & Whitaker fund its mortgages in-process?

This is unsubstantiated and unlikely.  Don't expect anything from Taylor Bean right now except an apology.

Is it true that Bank of America will be assuming mortgage servicing rights for Taylor, Bean, & Whitaker?

This is unsubstantiated but possible.  If you make your payments to TBW and your servicing rights are sold, expect notice within the next 2 weeks.  Until then, make your mortgage payments as agreed.  Don't wait to find out if your mortgage is being transferred before making your next payment.  You're still under contract to pay your mortgage on a monthly basis.

I paid for an FHA appraisal as part of my mortgage approval.  Do I have to pay for another appraisal with a new FHA mortgage lender?

It depends.  Some appraisers will charge a small fee to "assign" your FHA appraisal to a new lender and some will do it for free.  Depending on the age of your appraisal, though, you may be required to re-order and start fresh.  This will be the most expensive option, but it's out of your hands -- appraisal requirements are at the lender's discretion.

Okay, I get it.  I have to start from Square One with a new FHA mortgage application.  Do I get to keep my old mortgage rate?

No. When your mortgage application was canceled with Taylor Bean, your mortgage rate lock was canceled, too.  Your new mortgage rate will be whatever the current rates are for an FHA home loan.

Why can't I find any information about the shutdown on the Taylor, Bean, & Whitaker website?

Not sure about the answer to that one, actually. I can't find much either.

My loan officer says that Taylor, Bean, & Whitaker was his only FHA lender. What do I do?

If you are in need of an FHA mortgage and your loan officer can't help you for whatever reason, may be a good option for you. Or, you can . I'm strong with FHA mortgages and my rates are good.

What else do I need to know?

I think that's about it.  It's a simple story -- with a complicated fallout.  You're welcome to with any specific Taylor Bean questions. I'll do my best to answer them for you.

Updated: August 7, 2009 with new information from Conrad Venti.

UPDATE: September 18, 2009: The FHA is changing its FHA Streamline Refinance guidelines effective November 17, 2009. Some of the information on this page will be outdated soon.  Review the new guidelines here.

The FHA-insured mortgage market share has increased nearly 10-fold since 2006, indoctrinating first-time FHA borrowers across Illinois, Ohio and everywhere else into the sometimes-rewarding world of FHA mortgages.

As mortgage rates fall, demand for FHA Streamline Refinances is off the charts.

Now, if you've never heard of an FHA Streamline Refinance, you're not alone.  It's a program exclusive to FHA homeowners and that a club that's been historically pretty small.  As a result, FHA Streamline Refis have tended to slip past the American Consciousness.

That doesn't make them less relevant, though.

For FHA homeowners, there are 3 major reason why the streamline refinance program can be superior to traditional, Fannie Mae-like mortgage refinance.

1. It's consumer-friendly : The FHA won't approve your refinance unless the new mortgage payment is less than your current one
2. It's housing market-friendly : The FHA doesn't ask for an appraisal of your home and doesn't care if you're underwater
3. It's cost-friendly : If you've had your loan less than 5 years, the FHA refunds a portion of your original closing costs directly to your bottom-line

So, although you may have been shoe-horned into FHA financing when you bought your home -- and maybe that upset you -- whenever mortgage rates start to fall , you'll be super excited about your FHA Homeowner status.

There's a host of differences between an FHA Streamline Refinance and a traditional conforming mortgage refinance, actually.  For one, FHA Streamline refinances don't require proof of income from the homeowner -- no paystubs, no W-2 statements, no tax returns.  Instead, the homeowner must just prove that he's still employed.

A phone call into Human Resources can accomplish that.

This "No Income Verification" nature of an FHA Streamline Refinance is in keeping with the FHA's over-riding philosophy that homeowners making payments at a higher mortgage rate should logically be able to make payments at a lower mortgage rate.

It's the same for the "no appraisal" requirement.  Unlike conforming mortgages that are securitized and sold via Wall Street, the Federal Housing Authority is the only insurer and guarantor of FHA home loans.  Because of this, the FHA isn't concerned about whether its borrowers' home lose value -- it's on the hook for the loan either way.

The FHA is more concerned about helping FHA homeowners get payment relief because it knows lower housing payment makes default less likely in the long-run.

However, getting approved for an FHA Streamline Refinance isn't a rubber stamp. It does come with some obstacles.

1. Homeowners must be current on their mortgage payments.  No 30-day, 60-day, or 90-day delinquencies are allowed from the last 12 months.
2. Homeowners must have at least 6 months of history paying on their current mortgage. "Instant refis" are not allowed.
3. The new loan size can't exceed the original size of the FHA loan being replaced

In addition, some lenders -- but not all -- impose minimum credit score requirements.

As of May 2009, the most common minimum credit score for an FHA Streamline Refinance is 620.  Not every lender has this requirement, though.  At least one investors through which I lend, for example, allows credit scores down to 500.  if you've been told your FICO is too low for an FHA Streamline Refinance --  I can help.

And then there's the closing costs.

Every home loan carries fees and FHA Streamline Refinances are no different.  There's title charges, underwriting charges and the other "normal" refinance fees.  There's also the FHA's upfront mortgage insurance premium, paid at every FHA closing.  MIP often equals one-and-a-half percent of the loan size and rolled right into the mortgage.

However, because the size of an FHA Streamline Refinance home loan can't exceed the starting size of the FHA loan it's replacing, up-front mortgage insurance premiums can sometimes put homeowners in a position where cash is required at closing.  Opting for a "no cost" FHA Streamline Refi can diminish the likelihood of this occurring, but there's no promise.

Thankfully, the FHA takes a pragmatic approach to upfront MIP.

If you're current FHA mortgage is less than 36 months old, the FHA will refund a portion of your original upfront mortgage insurance at the time of closing, applying it directly to your settlement statement.

The refund chart is above. Similar to driving a car off the lot, the premium's refund value drops 20% in Month 1 after which it reduces by 2 percent per month until the 10 percent level in reached in Month 36.

A FHA homeowner that paid $3,000 in upfront MIP six months ago, therefore, would be entitled to a $2,100 refund.  After 9 months, the refund falls to $1,920.

In three years, the FHA MIP refund falls to $300.

Now, because of how the FHA mortgage insurance refund process is structured, it should be obvious that the FHA compels its borrowers to refinance into lower rate mortgages as soon as possible.  The longer that homeowners delay on the decision to refinance, after all, the lower their FHA rebate becomes and, therefore, the higher will be their closing costs.

Again, this approach is consistent with the FHA's goal of getting its homeowners' mortgage payments down whenever possible.  The FHA incents people to "act now" as opposed to trying to wait out the market.

FHA streamlines have been especially popular lately and with FHA market share continuing to grow, they'll be a helpful vehicle for FHA homeowners looking to lower their monthly payments.  If you're in want of some FHA advice or need help calculating what your FHA Streamline Refinance MIP refund will be, reach out to me anytime.  My contact information is below.

UPDATE: September 18, 2009: The FHA is changing its FHA Streamline Refinance guidelines effective November 17, 2009. Some of the information on this page will be outdated soon.  Review the new guidelines here.

If you've been a loan officer long enough, you start to notice certain trends emerge in mortgage rates, mortgage products, and in the market overall.

Here's an easy trend that even the lay can understand: When loan defaults spike, mortgage guidelines get tight.  It's why I'm telling you for the last time: It will never be easier to be approved FHA than it is today.

If your homebuying or refinance plans call for a FHA mortgage, consider moving up your time frame.

Here's the three reasons why:

1. Mortgage applicants with lower credit scores now get their "best pricing" with FHA mortgages
2. Unless you live in a rural area or are a veteran, FHA mortgages are now your last remaining low downpayment program.
3. FHA mortgages are insured by the U.S. government

Separately, these points may not seem like much, but put them together, and it's clear why U.S. taxpayers are the insurer of thousands of newly-issued, low-FICO, high-LTV home loans.

The American Homeowner's lovefest with FHA started exactly one year ago -- on the day the conforming mortgage insurer Fannie Mae first instituted loan-level pricing adjustments (i.e. risk-based pricing). Because of LLPAs, mortgage applicants with lower-than-average credit scores found better rates and lower fees through FHA.

Then, between April 2008 and April 2009, as Fannie Mae added new LLPAs and tightened its guidelines, mortgage applicants found FHA to be both cheaper and more flexible than its conforming mortgage cousin. Predictably, the statistical set of mortgage applicants most likely to default went FHA almost exclusively -- if only because there was no other option for them.

FHA insured 1 in every 50 mortgages issued in 2006.  Today, it insures 1 in 3.

The FHA's loan portfolio is steadily deteriorating. Fannie Mae and Freddie Mac get every "ultra low risk" mortgage to insure and FHA gets everything else. It's one reason why FHA's cash cushion has plummeted and why the FHA default rate is climbing.

When mortgage defaults rise, mortgage guidelines tighten. 

For example, already this year, FHA stopped offering 95% cash out refinances. Instead of lowering the maximum allowable loan-to-value by five percent, though, as is customary, FHA dropped the LTV by 10 percent instead.  This signals to the market that FHA's policymakers are concerned about loan quality.  It's a leap instead of a step.  Downpayment assistance programs are now prohibited, too.

Expect more changes from FHA this year.  It may come in the form of risk-based fees, loan-to-value restrictions, or stricter debt-versus-income requirements, but it's going to come.  And when it does, some of the people that qualify for FHA home loans today and going to find themselves on the outside of the fence looking in, wishing they acted sooner.

Remember: Each time Fannie and Freddie tighten their guidelines, more of the "riskiest" borrowers go FHA as their back-up plan.  It doesn't mean that FHA borrowers are default-prone, per se, it just means that while Fannie and Freddie get the pick of the litter, the FHA gets everyone else.  It's why the FHA's loan pool could be more like a cesspool over the next 12-18 months.

Moving forward, expect to read more stories about the FHA and its growing percentage of mortgage defaults.  The data won't be telling the whole story, though.  The FHA's problems will be the result of Fannie Mae and Freddie Mac turning away borrowers at the door, not FHA's letting everyone in.

This isn't a new story, but more of a reminder. 

The FHA is discontinuing its 95% cash-out refinance program effective April 1, 2009. For all case assigmements made on or after April 1, 2009, cash-out refinances are limited to 85%.  "Case assignment" is FHA-speak for "registered loans".

It's a move that shouldn't surprise you.  As Fannie Mae and Freddie Mac have tightened their respective underwriting guidelines and added onerous loan-level pricing adjustments, the FHA has become the lender of last resort for a lot of Americans.

• Is your credit score under 680? Think FHA.
• Is your downpayment less than 10%? Think FHA.
• Are you trying to take cash out from your home?  Think FHA.

See, over the last 18 months, Fannie and Freddie have repeatedly narrowed their respective strike zones.  That's bad news for people in want of a mortgage because Fannie and Freddie are often the source of the lowest-cost mortgages. After opening the lending door for everyone and his mother, both groups pulled back guidelines to a point where if you're not considered an excellent risk, they don't want you.

Now, FHA is getting tighter, too.  In limiting FHA cash-out refinances to 85% loan-to-value, it's also setting a few other rules:

1. With less than 12 months since purchase, the home's appraised value cannot exceed its purchase price -- even if you've made home improvements.
2. If you're delinquent on your home loan, you cannot do a cash-out refinance
3. Co-signers can't be added to the mortgage note for purposes of qualifying

The FHA's moves are a defensive one.  As Fannie and Freddie turn away would-be borrowers, the FHA is insuring all of the "less-than-perfect" home loans.  Like in Coming To America, when Hakeem tells Lisa that his job is to clean up the trash, that's what the FHA has been doing. 

When you think of garbage, think of Akeem FHA!

The FHA's loan pool is disgusting right now.  Riddled with early-payment defaults, the FHA's portfolio quality is deteriorating and the powers-that-be have the difficult job of making loans available without making them too available.  My guess is that more tightening will be on the way throughout 2009 and 2010 and the government realizes that it's on the hook for a lot of bad loans.

Either way, you have to give the FHA credit.  At least they set deadlines and warn people about them.

If you have need to take a cash-out mortgage and the conforming lenders are telling you "no", look FHA and get your loan registered with a loan officer no later than Tuesday, March 31, 2009.  And be sure to check your local FHA loan limits, too -- they're different from your local conforming loan limits.

The government published the 2009 FHA Loan Limits for all 3,141 counties in the United States.  As expected, loan limits will recede from their temporary levels of 2008.

As in 2008, the 2009 FHA loan limits are based on the number of units in the property -- from 1-unit to 4-unit:

• 1-unit : $271,050
• 2-unit : $347,000
• 3-unit : $419,400
• 4-unit : $521,250

Now, it's important to note that the new FHA loan limits only apply to most areas of the country -- Hamilton County, Ohio, for example.  But, in other areas -- classified as "high cost" areas -- the FHA will insure higher loan sizes in 2009 than the 1- to 4-unit figures listed above.

"High cost" areas are calculated using mathematics and typical home prices. 

If a county's median home price multiplied by 1.15 is larger than that FHA loan limit listed above, the product is that county's new 2009 FHA loan limit, not to exceed $625,500.  In Illinois, therefore, high cost areas include Cook County and the collar counties, and in Ohio, it includes Franklin County.

And don't worry about doing the math yourself -- you can download this county-by-county PDF of 2009 FHA Loan Limits as a good reference point.  Plus, it has my contact information for when you have questions.

The FHA rolled out risk-based mortgage pricing this week, matching steps that Fannie and Freddie took earlier this year.  In its press release, the FHA lists some exceptions including 15-year mortgages.

Prior to the risk-based changes, FHA home loans were usually accompanied by an easy-to-remember fee schedule of 1.500 percent of the loan size due at closing and an ongoing annual mortgage insurance premium equal to 0.500 percent of the original loan size.

The new fee schedule is not as straight-forward.  "Ideal" borrowers are rewarded for using using FHA-insured mortgages.  "Risky" borrowers are penalized.

Of course, rewards and penalties are relative because versus conforming mortgages -- ones guaranteed by Fannie Mae and Freddie Mac -- home buyers using FHA will generally get worse rates and pay higher fees over the long-term.  This is especially true when credit scores are low and/or downpayments are small.

One notable exception: home loans for multi-unit properties.

The FHA does not impose additional loan-level pricing adjustments for 2-unit, 3-unit or 4-unit properties.  Fannie and Freddie, by contrast, impose hefty multi-unit property fees of up to 1.000 percent.

This detail -- for the right homeowner -- could render FHA a much more attractive, even if FHA mortgage rates are slightly higher than their conforming counterpart.  As always, choosing the right mortgage product is rarely ebony and ivory.

Sometime soon, though, expect risk-based mortgage pricing will get more granular, accounting for additional details than just what's in the FICO-and-LTV Matrix shown above. 

Until it does, though, bookmark this page.  It's a lot easier to make sense of the chart than it is to translate official government-speak on the FHA adjustments, that's for sure.