Predatory lending would likely become a thing of the past if proposed regulatory reform rules are put into practice. And that may mean that mortgages get more expensive and more difficult to get, lenders warn.

The new rules, which Congress is expected to vote on this week, require that financial institutions ensure that borrowers can afford to repay the mortgages they are sold. Lenders would also have to tell borrowers the most they might pay on an adjustable rate mortgage and explain that payments will vary when the interest rate changes.
“These rules should help make sure people aren’t put into mortgages they can’t afford,” said Julia Gordon, senior policy council for the Center for Responsible Lending.

Additionally, the comprehensive reform package would also ban banks from offering incentives to steer borrowers into costlier loans when they could qualify for cheaper ones, a controversial practice that fueled the subprime lending boom.

And it would prohibit prepayment penalties for adjustable rate, subprime and other risky loans and limits them to three years for traditional loans. This would help prevent borrowers from being locked into expensive loans.
More work to get a mortgage

While bankers and consumer advocates differ on the bill’s impact on mortgage availability and cost, one thing is for certain: It would take more work to get a home loan.

While the bill doesn’t specify downpayment size or creditworthiness, consumers would likely need some savings and a good credit score if they want to land a loan. This shouldn’t be seen as a tightening of credit but as a return to prudent lending standards that existed before the recent housing bubble, experts said.

Gone would be the days of no-doc or stated income loans. Mimicking the current lending environment, borrowers would have to fully document their income with pay stubs, tax returns and the like.

This isn’t to say that the self-employed or small business owners wouldn’t be able to get home loans anymore. They’d just have to provide documentation that they can afford the mortgage.

“It’s a little more work for the consumer but when they take out mortgage debt, there’s a much higher degree of certainty that it’s not disadvantageous to them,” said Barry Zigas, director of housing policy for the Consumer Federation of America.

Other exotic loans, such as option adjustable rate mortgages, which allow borrowers to pay what they like but greatly inflates the principal balance, would be harder to come by. Lenders would be likely to stick with the more conservative fixed-rate or certain adjustable-rate loans.

Borrowers, however, would still have to be on their guard and thoroughly read through their paperwork and make sure they understand the terms of the loan, experts said.

Of course, many lenders are already putting these practices into place in the wake of the mortgage meltdown. But these rules are meant to codify them once the housing market picks up again.

“They are just basic, common sense rules of business and of fairness,” Gordon said.
Standards: To be determined

If the bill passes, it may be another 18 to 24 months before lenders and consumers fully realize its impact. It will likely take the mortgage industry’s proposed regulator, the Consumer Financial Protection Bureau, nine months to come up with the new rules and then more time for the industry to institute them, said John Courson, chief executive officer of the Mortgage Bankers Association.

The regulator also could decide to set standards on downpayment size, credit scores and total debt-to-income levels, Courson said. That would have a big impact on consumers.

Financial institutions warn that increased regulation — and potentially greater legal liability — could make it harder and more expensive to obtain a loan.

“The concern is there will be less choice for borrowers,” Courson said.

The Office of Housing’s latest efforts have a common thread: the continued need to strengthen protections for consumers in the home buying process. We are working to make the housing market stronger, sustainable, and safer. Two examples of our efforts to accomplish this goal are the recent reform of HUD’s Real Estate Settlement Procedures Act (RESPA) regulations which make mortgages more transparent and understandable, and the development of Safe Mortgage Licensing Act (SAFE) regulations which better protects consumers.

Transparency is important for consumer protection. Fair dealings require open, clear information. The SAFE Act helps increase the integrity of the mortgage process and prevent fraud. In combination with RESPA reform, consumers have greater protection from possible bad actors in the marketplace. These two measures highlight our commitment to regulatory reform and consumer protection in order to bring trust and stability back to the housing market.

RESPA IMPLEMENTATION

In a previous edition, I briefly discussed some aspects of the Real Estate Settlement Procedures Act (RESPA) Rule. I now want to update you on the great efforts the Department has made providing clarity to the industry during the implementation phase, primarily involving the use of the standardized Good Faith Estimate (GFE) and the revised and expanded Settlement Statement (HUD-1).

The Office of Housing has delivered a live webcast and hosted an Industry Roundtable, and has also met with and trained many lenders and others in an effort to resolve industry implementation inconsistencies. The RESPA staff has participated in more than 150 formal speaking engagements to educate industry professionals and state and federal regulators on the new RESPA rule and plan more in the future. The response has been overwhelming. Since HUD.gov/fha HUD press releases RESPA Webcast RESPA FAQs Homeowner Warranties and Related Compensation SAFE Act the start of the year, we’ve received and answered more than 7,000 emails. Finally, the Office is currently developing multi-media guidance and education for consumers.

Most recently we have posted additional Frequently Asked Questions (FAQs) on our website aimed to give detailed guidance on topics about which we have had the most inquiries. Two of the hottest topics are pre-approvals and the use of worksheets.
For full information and guidance, please refer to the FAQ’s.

Pre-approvals

A pre-approval is a document issued by a lender stating that a consumer qualifies for a specific loan amount prior to the consumer choosing a specific property.

If the loan originator is missing one of the elements it requires for a loan application (e.g., the property address) and is not required to provide a GFE, the originator is not prevented from verifying information for which the customer voluntarily provides documentation.

Also, a loan originator IS PERMITTED to determine that a property address is not one of the required pieces of information that the loan originator needs in order to issue a GFE. It is important to note that a loan originator must consistently apply its policy on the information it deems necessary to issue a GFE, and the RESPA rule requires a loan originator to issue a GFE whenever it receives information sufficient to complete an application for a GFE.

Worksheets

A worksheet is a document issued by a loan originator that may include generic information regarding interest rates and loan fees, or a document that may provide additional information to the consumer regarding the cost of the overall transaction outside of loan fees that are disclosed on the GFE.

A worksheet may be provided to a customer for a rate quote if the consumer does not want to provide the information necessary to generate a GFE. However, loan originators should ensure the following: (1) to eliminate consumer confusion, a worksheet should

not look like a GFE and should not lead the customer to believe that it is a GFE and (2) a loan originator should NEVER use a worksheet in lieu of a GFE.

A loan originator may also use a worksheet to provide the consumer with additional information about his or her loan transaction, such as the amount of cash needed to close, seller credits, and other non-loan transaction fees that would be helpful to the consumer.

HOMEOWNER WARRANTIES AND RELATED COMPENSATION

Another recent development in RESPA is that HUD’s Office of General Counsel has issued additional guidance on “Home Warranty Companies’ Payments to Real Estate Brokers and Agents.” This new rule interprets section 8 of RESPA and HUD’s regulations as they apply to the compensation provided by home warranty companies (HWCs) to real estate brokers and agents.

Specifically, the rule provides: “(1) A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under section 8; (2) Depending upon the facts of a particular case, an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge; and (3) The amount of compensation from the HWC that is permitted under section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.”

This rule was published on June 25. You may view this interpretive rule here.

SAFE ACT

Passed by Congress as part of the Housing and Economic Recovery Act of 2008 (HERA), the SAFE Act mandates that all individual Mortgage Loan Originators (MLOs) either be licensed by the state where they do business or, if they are employed by a federally-regulated depository institution, be registered. Both licensing and registration must be done through the Nationwide Mortgage Licensing System and Registry (NMLSR), which also provides MLO’s with unique identifiers. The SAFE Act sets forth minimum standards for state licensing.

HUD is responsible for ensuring that state regulators implement and maintain SAFE Act-compliant licensing systems, as well as ensuring the overall effectiveness of the NMLSR.

HUD’s SAFE Act Office has worked closely with the Conference of State Bank Supervisors (CSBS), the American Association of Residential Mortgage Regulators (AARMR) and the states to ensure that all U.S. jurisdictions enact SAFE Act-compliant licensing systems through legislation or regulations.

Final Rule Status

HUD published a proposed rule in the Federal Register on December 15, 2009, setting forth the minimum requirements that a state would have to meet in order to be compliant with the SAFE Act. As of this date, the proposed rule has not been finalized. In the absence of a final rule, HUD cannot provide definitive guidance regarding certain compliance issues.
HUD received over 5,300 comments from the public during the comment period on the proposed rule. Most of the comments were from organizations and individuals concerned that they would need to license their employees.

Those who commented included: non-profit agencies, housing counseling organizations, loan modification and servicing specialists, housing finance agencies, those involved in owner/seller financing, mortgage industry groups and other interested persons. In developing its final rule, HUD is working to address concerns raised by comments.

In closing, I hope you find these overviews helpful. I am confident that updating the RESPA Rule and implementing the SAFE Act will lead to clear regulations for the housing industry, stronger protections for consumers, and a more stable housing market.

The U.S. House of Representatives on Thursday approved a bill to shore up the finances of the cash-strapped Federal Housing Administration while also backing a measure to raise the loan limits for FHA-backed mortgages used to develop some apartment buildings.

In a 406-4 vote, lawmakers approved legislation to strengthen the FHA’s finances by giving it authority to nearly triple the annual fees it charges to borrowers, known as mortgage insurance premiums.

But lawmakers struck down a proposed amendment to require borrowers who purchase a home with a loan backed by the FHA to put more money down.

Minimum down payments are still 3.5 percent, though lawmakers did back a plan to require the FHA to examine those down payment requirements every year and submit a report to Congress.

The proposal to raise down payment minimums to 5 percent, sponsored by New Jersey Republican Representative Scott Garrett, had not been not expected to pass but did force members of the committee to vote against tightening lending standards at a time when the FHA is under financial stress.

The FHA has capital reserves equal to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures, well below the 2.0 percent required by law, according to an independent actuarial study released late last year.

The bill would give the FHA authority to raise annual mortgage insurance premiums — which are paid out by the borrower over the life of the loan — to a maximum 1.5 percent. That’s up from the current 0.55 percent maximum, though the FHA says that if the measure becomes law it would gradually raise the premium–first to 0.85 percent or 0.9 percent.

To become law, the measure still faces approval by the Senate before President Barack Obama could sign it into law. A Senate version has not yet been introduced.

If the FHA is granted authority to raise the annual premium, FHA has said it would lower a separate upfront premium from the current 2.25 percent to offset those costs. The upfront premium is paid all at once at the time the loan is issued.

Representatives Anthony Weiner, a Democrat from high-priced New York and Republican Gary Miller from high-priced Southern California, sponsored the amendment, approved by voice vote, to increase the loan limits for buildings to be devloped into rental apartments.

FHA Commissioner David Stevens has repeatedly expressed confidence that the agency’s Capital Reserve Account would return to levels above 2 percent as recent changes to FHA underwriting standards would bring an additional $5.8 billion to FHA coffers.

The non-partisan Congressional Budget Office estimates those changes will bring just $1.9 billion to the FHA.

Because about 80 percent of the FHA’s business is with first-time home buyers, who typically make smaller down payments, the FHA’s role in the housing market is widely seen as vital.

The FHA’s share of the mortgage market has ballooned from a few percent in the boom years to more than 30 percent of home-purchase loans today as private capital has dried up. Including loans backed by Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the government is directly or indirectly backing close to 97 percent of the mortgage market.

The legislation’s chief sponsors are Representative Maxine Waters, a California Democrat, Representative Shelley Moore Capito, a West Virginia Republican and Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee.

The debate over whether to exempt certain mortgages from “risk-retention” rules in the financial-regulatory overhaul bill could become a case-study in the unintended consequences of lawmaking. (Read “Mortgage Players Look to Soften Bill“)

Both the House and Senate bills included risk-retention provisions that require mortgage originators to retain 5% of any loans that are bundled together and sold off in pieces to investors. If lenders, the thinking goes, had been forced to own a piece of the no-money-down, we-won’t-verify-your-income loans that they made during the housing boom, they might have been more careful.

The mortgage industry hates this provision because it would require them to hold more capital and they say that it would raise the cost of making mortgages. Small banks say the higher-capital requirements would make it harder for them to sell loans into the secondary market.

The Senate wants an industry-backed provision that would exempt from the risk-retention rules a broad group of “qualified” mortgages that conform to certain standards, such as those that are fully documented and fully amortizing loans. But Rep. Barney Frank, concerned that such a provision is too generous, proposed this week a measure that would exempt only loans from government agencies such as the Federal Housing Administration. Regulators would be free to later exempt other specific loans.

The trouble is that such a fix could cause new headaches. By giving the FHA an exemption to risk-retention rules, the government risks cementing the FHA’s already huge role in the mortgage market at a time when federal housing officials say they want to wean the market off government life support. The agency accounts for 25% of all mortgages today, up from 2% during the subprime heyday, when its lending standards were viewed as too strict.

The irony is particularly rich because Congress, which wants risk-retention rules in order to encourage prudent underwriting, might exempt the FHA, which today has the easiest loan terms today by offering minimum 3.5% down payments. If private lenders were required to hold any of the risk on those loans, they would probably not make as many of them.

Congress may feel pressure to exempt government-guaranteed loans because the current legislation is unclear about whether investors might now have to retain the risk in those loans, potentially altering the 100% government guarantee. Those loans are bundled and sold to investors as Ginnie Mae securities, which carry the full faith and credit of the U.S. If the risk-retention rules were to somehow alter that 100% government guarantee, the securities could lose some luster.

The Senate version, meanwhile, would exempt more loans under its standards for so-called “qualified” mortgages. Loans that had less than 20% equity, for example, could be considered safe as long as they had mortgage insurance.

Of course, many of those loans have not performed well during the housing bust. While Freddie Mac reported that 4.08% of its loans were 90 days or more past due in April, that delinquency rate was more than double, at 8.68%, for loans that had mortgage insurance and other “credit enhancement.”

Donovan made the comments as the Obama administration introduced a new “scorecard” to assess the government’s efforts to stabilize the housing market. Donovan said the market is in a “fragile” recovery and “significantly better” than predicted a year ago.

“We still may see further declines,” he cautioned.

Delinquencies on FHA-backed loans rose slightly to 12.4 percent in May from 11.7 percent in April, but were down from 13.6 percent a year earlier after stronger-than-expected performance in the first half of 2010.

“Overall FHA performance is somewhat better than was predicted when the actuarial review was completed” in the fall of 2009, Donovan told reporters on a conference call.

An independent actuarial study last autumn said FHA capital reserves had fallen to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures, well below the 2.0 percent required by law.

The report is an effort by the Obama administration to bring more attention to all its housing programs. The best known, the Home Affordable Modification Program (HAMP), which provides incentives to lenders to modify loans for troubled borrowers, has been widely criticized as ineffective.

The latest HAMP statistics released Monday show that slightly more than one in ten borrowers eligible for lower payments has received a permanent loan modification, while about one in three borrowers who started in the trial program has been kicked out.

The number of borrowers who have received a permanent loan modification rose to 340,459 in May from 295,348 reported in April. That’s about 11 percent of 3.2 million HAMP eligible loans.

At the same time, the number of trial modifications continued to fall as borrowers must now provide proof of income prior to any new payment plan. Active trial modifications fell to 467,672 from 637,353 in April.

And borrowers who received loan modifications under the old rules are now having to prove their income before getting a permanent modification.

An additional 150,000 borrowers who could not prove their income or keep up with the new payments had their modifications canceled in May, bringing the total number of cancellations to 429,696. That’s about 35 percent of the 1.24 million trial modifications started.

Edward Pinto, a former top official at Fannie Mae who now works as a consultant to private sector mortgage lenders, cautions that FHA’s strategy of growing its way out of its problem “is always very dangerous.”

“What they are doing is rebuilding their capital (reserves) by maintaining a very high market share,” Pinto said, noting that FHA’s share of the mortgage market has ballooned to 30 percent from just a few percent during the housing bubble.

“The first rule of banking and lending is when you are in a hole, stop digging,” he added.

Donovan noted that home prices have leveled off in the past year after 30 straight months of decline and the number of homeowners who have received a restructured mortgage since April 2009 has risen to 2.8 million.

THE FEDERAL Housing Administration has been busy lately, propping up the housing market. The FHA’s outsized role in real estate has earned it intense scrutiny on Capitol Hill, where legislators are already choking on the staggering tab Fannie Mae and Freddie Mac are sticking them with. To its credit, the agency is moving decisively to repair its balance sheet and avoid a government bailout.

But in Boston, one recent FHA move is sowing some unintended consequences: It’s threatening to wall off entire neighborhoods in the city and close-in suburbs from the working-class homebuyers the FHA serves. These buyers are running into trouble because of a quirk in Boston’s development history that has left a permanent imprint on the city’s geography.

The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today introduced a monthly scorecard on the nation’s housing market. Each month, the scorecard will incorporate key housing market indicators and highlight the impact of the Administration’s unprecedented housing recovery efforts, including assistance to homeowners through the Federal Housing Administration (FHA) and the Home Affordable Modification Program (HAMP). This scorecard contains key data on the health of the housing market including:

* After 30 straight months of decline and an expectation of continued nearly 14 percent decline, home prices leveled off in the past year and expectations have adjusted upward

* Mortgages are more affordable: due to historically low interest rates, more than 6 million homeowners have refinanced, saving an estimated $150 per month on average and more than $11 billion in total. And more than 2.5 million families have purchased a home using the First-Time Homebuyer Tax Credit.

* Servicers report that the number of homeowners receiving restructured mortgages since April 2009 has increased to 2.8 million. Additionally, nearly half of homeowners unable to enter a HAMP permanent modification enter an alternative modification with their servicer, and fewer than 10 percent of cancelled trials move to foreclosure sale.

* However, the foreclosure prevention initiatives are not intended to help all borrowers and the market will continue to adjust for some time. The supply of homes on and off market remains near all-time highs. It will take time to work though this large inventory.

“We already know that due to the Obama Administration’s efforts, the housing market is significantly better than anyone predicted a year ago,” said HUD Secretary Shaun Donovan. “This scorecard will allow the American people to monitor the Administration’s efforts to strengthen the housing market on a monthly basis and hold the government and industry accountable. Demonstrating the progress in the housing market due to the Administration’s policies, this month’s report provides a broad set of indicators showing encouraging signs of recovery.”

“The Administration’s housing policies, combined with actions of the Fed, have lowered mortgage interest rates, helped stabilize home prices and reduced the rate of foreclosures, repairing some of the damage caused by the financial crisis to the financial security of millions and millions of American families,” said Treasury Secretary Tim Geithner. ” And the Administration’s loan modification programs have given more than a million responsible homeowners a chance to stay in their homes. We are going to keep working to help the Americans hardest hit by this crisis, and as we do we will make sure we are careful stewards of the scarce resources of the American taxpayer.”

The Administration’s goal is to promote stability for both the housing market and homeowners. To meet these objectives, the Administration developed a broad based approach including state and local housing agency initiatives, tax credits for homebuyers, neighborhood stabilization and community development programs, mortgage modifications and refinancings, and support for Fannie Mae and Freddie Mac. These efforts build on Federal Reserve and Treasury mortgage backed securities purchase programs that have helped to keep mortgage interest rates to record lows over the past year.
These initiatives have resulted in measurable progress, particularly in affordability of mortgage credit across the market. Low interest rates have helped more than 6 million families refinance, resulting in more stable home prices and $11 billion in total borrower savings. More than 2.5 million Americans purchased a home using the First-Time Homebuyer Tax Credit, helping to further stabilize home prices.

At the same time, FHA has helped maintain affordability by playing an important backstop role, stepping in to support home purchase and refinance activity at a time when private capital was fleeing the mortgage market. In addition, the FHA helped nearly 400,000 homeowners stay in their homes since April 2009 through FHA loss mitigation efforts, which include modification options. While providing access to affordable mortgage capital and helping homeowners prevent foreclosures, the FHA has also taken unprecedented administrative and regulatory steps to improve risk management and has pursued essential reforms to strengthen its finances.

Servicers report that the number of homeowners receiving restructured mortgages since April 2009 has increased to 2.8 million. This includes more than 1.2 million homeowners who have started HAMP trial modifications and nearly 400,000 who have benefitted from FHA loss mitigation activities. Of those in the HAMP program, 346,000 have entered a permanent modification saving a median of more than $500 per month.

The housing scorecard now incorporates the monthly Making Home Affordable Program Servicer Performance Report, including HAMP modification data that once again shows a month-over-month increase in permanent modifications, with average growth of roughly 50,000 permanent modifications per month over the last four months. Servicer data indicates close to half of the homeowners in HAMP trial modifications who were ultimately ineligible for a HAMP permanent modification were offered an alternative modification and less than 10 percent move to foreclosure sale In addition to the modifications through HAMP, servicers have adopted the HAMP guidelines as an industry standard and are now initiating their own modification agreements incorporating many of the HAMP affordability principles. . Homeowners who cannot afford a modified payment under HAMP may also be eligible for the Administration’s Foreclosure Alternatives Program, to help relocate to more affordable housing that is sustainable over the long term.

The housing scorecard details new reporting on both the scope of Treasury’s compliance activities and the areas of focus for compliance reviews under HAMP. Compliance activities include on-site reviews, file reviews and reviews of net present value (NPV) model applications. Also included are the first-ever results of compliance-related “second look” reviews of select servicers to ensure that potentially eligible borrowers were solicited and properly evaluated for HAMP. Treasury’s compliance activities will lead to improvements in servicer performance and process improvements designed to minimize the likelihood that borrower applications are overlooked or that applicants are inadvertently denied a modification.

Complete Housing Scorecard available at: www.hud.gov/scorecard

The Federal Housing Administration reform bill overwhelmingly approved in the U.S. House of Representatives last Thursday will strengthen the housing finance agency, but will likely prove to be mixed blessing for homebuyers.

The legislation, passed by a vote of 406 to 4, would raise fees for borrowers, give the FHA the power to oust lenders that are costing the agency too much money in claims, and make it easier for the FHA to protect itself from fraud-related losses. On the positive side, it will also allow borrowers to get mortgages with smaller down payments.

The primary purpose of the reform legislation – introduced by Rep. Maxine Waters (D-Calif.) – was to shore up the deteriorating finances of the FHA, an agency whose prominence in the mortgage business has skyrocketed lately.

The FHA doesn’t make home loans; instead, it insures lenders against default. Less than four years ago, it was handling only 4 percent of home loan volume. Today, the agency insures roughly one-third of all new mortgages in the U.S.

Last year, however, the FHA reported that its reserves had fallen to just $3.6 billion as of Sept. 30. That represented a scant 0.53 percent of the $685 billion worth of FHA-insured loans at that time. By law, the reserves in FHA’s Mutual Mortgage Insurance Fund must be at least 2 percent of all FHA loans.

So the House bill will bolster the FHA’s capital by allowing agency to nearly triple the caps on annual mortgage insurance premiums it charges to 1.50 percent from 0.55 percent of a mortgage. Those premiums are paid by borrowers over the life of their home loans. The FHA says the premium increase will cost the average borrower about $42 a month.

For borrowers, the tradeoff for paying higher fees is that homebuyers will have more ready access to credit and can get mortgages with smaller down payments of just 3.5 percent, versus the 5 percent to 20 percent down payments typically required by conventional mortgage lenders.

Industry groups applauded the move, saying it will safeguard the FHA and help it continue its role of providing affordable housing to low-to-moderate-income Americans.

“We hope the Senate will be empowered by the House action and will consider similar legislation quickly,” said Robert Story, chairman of the Mortgage Bankers Association.

No companion legislation on FHA reform has been introduced yet in the Senate. But it’s expected to take up the matter after the July 4 recess.

Several Amendments Defeated

In many ways, the House version on FHA reform is as notable for what was not included in the bill, as for what did make it into the final legislation.

In passing the FHA legislation, the House defeated three other hotly-debated proposals:

* A proposal to raise down payments on FHA loans to 5 percent from 3.5 percent.
* An amendment by Republicans to scale back by 2012 the FHA’s market share to 10 percent of all newly originated mortgages.
* An amendment to lower FHA loan limits, which are now as high as $729,750 in high-cost areas of the country.

It was the proposal to raise down-payment requirements, though, that was the most contentious. The amendment was introduced by Rep. Scott Garrett (R-N.J.), who had argued that bigger down payments would promote responsible, sustainable homeownership by making borrowers more committed to their mortgages and less likely to walk away from underwater homes.

Garrett wasn’t the member of Congress to first to try to push through the idea of larger down payments for FHA loans. Multiple attempts in the Senate by Sen. Richard Shelby to increase the FHA minimum down payment to 5 percent also have failed.

The Mortgage Bankers Association, the National Association of Home Builders and the National Association of Realtors all supported efforts to keep down payment requirements at 3.5 percent.

“The current 3.5 percent down payment represents a significant financial commitment and sufficient investment to insure a borrower’s seriousness about homeownership,” said NAR President Vicki Cox Golder.

She added that raising down payment requirements would “have an especially harsh impact on African American and Hispanic borrowers, who traditionally have much lower accumulated wealth and have benefited from the opportunities offered by fully documented, standard FHA loans with low down payments.”

In 2009, the FHA was by far the largest source of financing for minority borrowers, insuring 52% of all loans made to African-American homebuyers and 45% of mortgages to Hispanics.

A Compromise on the Down Payment Issue

Ultimately, the prospect of raising down payment requirements at the current time appeared to be unpalatable politically and economically. Such a move before a midterm election could have proved unpopular with voters. Moreover, toughening mortgage requirements for borrowers – by demanding bigger down payments – runs contrary to the federal government’s efforts to help bolster the U.S. housing market.

President Barack Obama and his advisers, who have struggled to come up with effective widespread solutions to the country’s housing and foreclosure problems, explicitly opposed the idea of raising down payment requirements.

FHA Commissioner David Stevens told a House Financial Services panel in March that the Obama administration “determined after extensive evaluation that such a proposal would adversely impact the housing market recovery.”

By the FHA’s own analysis, raising the down payment requirements would have precluded some 300,000 borrowers from buying a home and added just $500 million to the FHA’s coffers. By comparison, other FHA changes, including raising fees on borrowers, would generate some $4.1 billion.

Nevertheless, the issue of forcing home borrowers to make larger down payments, and have “more skin” in the game won’t be going away any time soon. Indeed, lawmakers struck a bit a a compromise on this topic in passing FHA reform.

One provision successfully injected into the House reform bill requires the agency to examine down payment requirements annually and submit yearly reports to Congress on the matter.

So even though borrowers may still be able to secure low down payment FHA mortgages now, there’s certainly no guarantee that FHA requirements won’t be toughened in the future. So, prospective home buyers considering FHA loans in 2011 and beyond should position themselves for the possibility of having to make bigger down payments.

Future Givebacks to Borrowers?

FHA’s health is critical not to just borrowers who get FHA-insured loans, but to the entire housing market and taxpayers everywhere.

FHA’s market share, combined with loans backed by Fannie Mae and Freddie Mac, means that the government now directly or indirectly backs more than 95 percent of the U.S. mortgage market. Without a fix to FHA’s financial woes, observers feared that the agency might have to receive a government bailout – as did Fannie and Freddie, which were seized by federal regulators in 2008.

Coming up with a down payment has historically been the biggest impediment to becoming a first-time homebuyer. So it’s no surprise that many prospective mortgage borrowers have been flocking to FHA loans amid the credit crunch.

The reform legislation – if passed by the Senate as well – may hold out one other attraction for FHA borrowers. The FHA says if it ultimately wins the power to raise annual premiums, it will lower another charge imposed on borrowers: an upfront premium, which is now 2.25 percent. The FHA plans to slash that premium to just 1 percent.

During the long years of the financial crisis, the American economy has been like a retelling of the Somerset Maugham story “Appointment in Samarra,” in which a man unsuccessfully runs from city to city in attempts to avoid a run-in with Death — who, of course, is one step ahead of him. Similarly, investors have now spent years dodging disaster in one area of the markets, only to find their investments coming to a bad end elsewhere.

Oddly, however, there is one sector that has been outrunning the reaper since 2007, and it’s the last place you’d expect to have survived so long: commercial real estate. For much of 2008 and 2009 CRE was awash in red ink, and yet it hangs on. Richard LeFrak, chairman of the LeFrak Organization, said at the Milken Institute Global Conference in April, “The failure that we were all anticipating in the commercial real estate market, it kind of didn’t happen. We blinked, it went away.”

The only question now is how long it can keep up the sprint while the ghosts of boom-time leverage haunt the sector, and $1.4 trillion in loan maturities loom three years over the horizon.

To crash or not to crash: Which side is right?

There is a sharp disagreement among experts in how things will play out. Some predict foreclosures, loan defaults and a national crisis of disastrous proportions. In that corner is Elizabeth Warren’s Congressional Oversight Panel, which flatly predicted this year that commercial real estate loans are heading for a crash that will bring down small banks, destroy small-business lending and create “a downward spiral of economic contraction,” in her ominous words.

On the other side, investors in commercial properties and buyers of commercial mortgage-backed securities believe that the commercial real estate market will continue to suffer until it hits a bottom, but it will never crash in the way that the residential market collapsed. They believe that commercial real estate will be an example of how a market can take the hits and keep on ticking, that not every spot of trouble results in a crisis, that an industry can actually, somehow, stop a crisis if it acts early enough and has enough support.

Peter Roberts, Chief Executive Officer of the Americas for property giant Jones Lang LaSalle (JLL), put it this way: “We’re not going to see a ‘crash’. We’re going to see a long work-through.” Roberts believes commercial property values are in the process of bottoming out and will get to the ground floor by early 2011.

He credits the government’s support programs in capital markets with reversing the psychology of nervous markets in 2009: “The powers that be are very focused in making sure that we don’t have a crash in the real estate market. That has infused the mindset of investors.”

The Hilton maneuver

Investors are making the most of their good luck while they can. There have already been deals of several different varieties that show us their plan for addressing the problem of high-water mark commercial mortgages coming due.

Of them, there’s no better example of temporarily sidestepping the debt monster than Blackstone Group’s clutch move with Hilton Hotels. The PE firm’s $26 billion buyout of Hilton in 2007 — with $20 billion of outstanding debt due by 2013 — is a prime example of the sweaty palms that high leverage deals can cause even savvy investors.

But in April, Blackstone (BX) bought back $1.8 billion of Hilton’s debt and restructured another $2.1 billion to turn it into preferred equity. Blackstone also pushed off the maturities of the remaining $16 billion until 2015, buying itself two whole years of breathing room. Hilton is still debt-laden, but it’s not dead — and hedge-fund investors speak approvingly of Blackstone’s decisions to face its problems early.

The deal has kicked off a quiet trend of what one real-estate investor at a hedge fund calls “mini-Hiltons” — a pending wave of real estate investors seeking to buy back and restructure their own debt to stay alive until the recovery.

In another pattern, auctions for distressed assets are becoming more and more competitive, giving troubled assets quick homes. One of the most notable was the acquisition of Corus Bankshare’s $4.5 billion real estate portfolio, sold for a mere 60 cents on the dollar in an FDIC auction to a group of real estate investors and hedge funds including Barry Sternlicht of Starwood Capital Group, TPG Capital, WLR LeFrak and Perry Capital. The FDIC kept the majority of the portfolio, but gave the buyers zero-percent financing — a sweet deal for any investor.

Unhinged loans

Since properties have become so hard to buy, many investors have turned with voraciousness to the bundles of securitized loans known as commercial mortgage-backed securities, or CMBS. If anything in commercial real estate stands ready for a reckoning, it is these securities.

Despite CMBS hurtling toward higher default rates, however, investors who have faith in them are practicing some serious compartmentalization. They say that there are only some CMBS — and some tranches of CMBS — that will be hurt. They believe that the highest-rated tranches, rated triple-A, are in no danger.

They also say that CMBS could never create as much havoc as their residential cousins because of their structure: They are made of whole loans that haven’t been chopped up as much in the Wall Street sausage factory, and are based on stronger assets.

The tranches most likely to be hurt, of course, are those with the worst ratings – the triple Bs. These were the biggest victims of lax underwriting standards. According to Commercial Mortgage Alert, the boom years of 2005 through 2007 saw a total of $602 billion in CMBS issuance. (The CMBS written during those three years, by the way, account for a whopping 49% of all CMBS written over the past 20 years.) Those are likely to be the problematic securities. The CMBS written before and after don’t have as much leverage put on them, say investors.

CMBS, however, accounts for only about 20% of the total loan market, according to Jones Lang LaSalle’s Roberts. The bigger danger to the capital markets — and to banks — are speculative commercial loans, like those in construction and land loans. Those aren’t backed by firm assets and are a key part of the reason that many smaller banks have failed in recent years. It is these loans, in particular, that worry Warren and others, and could yet bring a reckoning to CRE.

There is a lot riding on the outcome of commercial real estate’s do-it-yourself salvation. If the sector can escape the same kind of crash that took down residential real estate, then we have a case study in how investors and government can prevent a crash before it happens. If it doesn’t work, however, the economy could be hit again at a moment when it is least able to bear the punch. To top of page

In an effort to better serve the American people, the U.S. Department of Housing and Urban Development (HUD) has embraced social media and streamlined its Web site contact tools to facilitate open communication and total transparency.

“When you are seeking information, nothing is more frustrating than not being able to contact someone who can help you get answers to your questions,” said HUD’s web communications architect, Eileen Coleman. “We believe that communication and transparency are vital, and we are continuously working to improve our communication methods.”

As the new generation of information seekers primarily accesses news and other content through social networking sites like Facebook and Twitter, HUD deemed it essential that the Department get up to speed on today’s popular channels of communication. After all, 50 percent of Facebook’s 400 million users log on every day, according to Facebook. Furthermore, while only 21 percent of Twitter’s 19 million users are active, that’s still 3,990,000 people to reach, according to Mashable.com, a respected social media news blog.

HUD also created its own Youtube channel, which currently features Lead Free Kids, a collaborative effort with the Ad Council about lead-based paint, and a short informational video about fair housing. Users access 2 billion videos a day on YouTube, according to the site.

Ultimately, the proof is in the numbers and in the preferences of the American people. So, stay connected with HUD via RSS (really simple syndication) Feeds, the HUD Facebook page, HUD Twitter, the HUD Youtube Channel, the HUD wiki and the recently launched HUD Mobile site.

* RSS Feeds
* HUD Facebook page
* HUD Twitter
* HUD Youtube Channel
* HUD wiki
* HUD Mobile

Contact the FHA Resource center or get help from HUD staff via contact us web page, accessible from the main navigation bar on the HUD.gov home page.