Recently the Federal Housing Administration (FHA) has announced that they are making changes to their mortgage program and there has been a lot of controversy surrounding these changes.
Specifically, the FHA has implemented new policies on how they will handle condominiums, appraisals, down payments, and their streamline refinance process.
Although these might not seem like large changes when applied separately, they have all been put into place at basically the same time.
This has caused some disagreement throughout the industry as these changes have seemingly turned the FHA into a replica of the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.
Beginning November 2, 2009, the FHA has completely changed their approval process for condominiums.
Before this date, in order to obtain FHA financing on a condo, the applicant could obtain a "spot approval" for their home.
This meant that they would be able to get one unit approved for FHA financing without the entire having to be approved.
In order to attain spot approval, the condominium manager would have to fill out the spot approval disclosure asserting that the unit and building were compliant with FHA guidelines.
As long as that sheet of paper was on file, the homeowner could get a loan using FHA financing.
This process has been discontinued as of November 2, and the FHA is following in Fannie Mae's footsteps by establishing a condo policy very similar to the one they implemented in early January of this year.
This policy eliminates spot approval and mandates that the entire condominium be FHA approved in order for someone to obtain financing on a single unit.
In order to be FHA approved, the condominium must submit proof of their compliance with FHA guidelines and undergo an inspection.
This change is not the only change the FHA has made recently that closely resembles the GSEs.
The FHA has also announced an adaptation of the Home Valuation Code of Conduct that will take effect at the first of the year.
This policy ensures that appraisals are completely independent from commissioned parties in order to try and make certain that there are no biased or inflated appraisals.
Although the thought behind this is absolutely valid, the implementation is not perfect.
As seen with the appraisal management companies used in conjunction with the Home Valuation Code of Conduct, prices for the consumer are driven up, but payment to the appraiser has fallen.
This eliminates competition between appraisers and may not provide an incentive to the appraiser to perform quality work.
In addition to these changes, the FHA has recently discussed raising the required down payment amount for the 2nd time in a year, this time to 5%.
The reasoning for this is to further prevent defaults, but the argument is that it will also hurt the FHA quite a bit.
By requiring higher down payments, there will be less incentive to look to government loans as opposed to Fannie Mae or Freddie Mac (conforming) loans.
The FHA has also made some drastic changes to their streamline program to which Fannie and Freddie have no equivalent.
The ability to streamline your FHA loans is something which attracts many borrowers to this line of financing.
However, streamlines will now require full-documentation and a new appraisal in order to refinance to a lower rate.
These changes all but eliminate the advantages of a streamline refinance.
The changes that the Federal Housing Administration is employing seem to closely emulate decisions that the Government Sponsored Enterprises Fannie Mae and Freddie Mac made previously.
Whether or not this will be a positive thing is yet to be determined.
In this case, the data will have to be compiled before we will be able to create an accurate hypothesis on how these changes will affect borrowers and the housing market alike.
Specifically, the FHA has implemented new policies on how they will handle condominiums, appraisals, down payments, and their streamline refinance process.
Although these might not seem like large changes when applied separately, they have all been put into place at basically the same time.
This has caused some disagreement throughout the industry as these changes have seemingly turned the FHA into a replica of the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.
Beginning November 2, 2009, the FHA has completely changed their approval process for condominiums.
Before this date, in order to obtain FHA financing on a condo, the applicant could obtain a "spot approval" for their home.
This meant that they would be able to get one unit approved for FHA financing without the entire having to be approved.
In order to attain spot approval, the condominium manager would have to fill out the spot approval disclosure asserting that the unit and building were compliant with FHA guidelines.
As long as that sheet of paper was on file, the homeowner could get a loan using FHA financing.
This process has been discontinued as of November 2, and the FHA is following in Fannie Mae's footsteps by establishing a condo policy very similar to the one they implemented in early January of this year.
This policy eliminates spot approval and mandates that the entire condominium be FHA approved in order for someone to obtain financing on a single unit.
In order to be FHA approved, the condominium must submit proof of their compliance with FHA guidelines and undergo an inspection.
This change is not the only change the FHA has made recently that closely resembles the GSEs.
The FHA has also announced an adaptation of the Home Valuation Code of Conduct that will take effect at the first of the year.
This policy ensures that appraisals are completely independent from commissioned parties in order to try and make certain that there are no biased or inflated appraisals.
Although the thought behind this is absolutely valid, the implementation is not perfect.
As seen with the appraisal management companies used in conjunction with the Home Valuation Code of Conduct, prices for the consumer are driven up, but payment to the appraiser has fallen.
This eliminates competition between appraisers and may not provide an incentive to the appraiser to perform quality work.
In addition to these changes, the FHA has recently discussed raising the required down payment amount for the 2nd time in a year, this time to 5%.
The reasoning for this is to further prevent defaults, but the argument is that it will also hurt the FHA quite a bit.
By requiring higher down payments, there will be less incentive to look to government loans as opposed to Fannie Mae or Freddie Mac (conforming) loans.
The FHA has also made some drastic changes to their streamline program to which Fannie and Freddie have no equivalent.
The ability to streamline your FHA loans is something which attracts many borrowers to this line of financing.
However, streamlines will now require full-documentation and a new appraisal in order to refinance to a lower rate.
These changes all but eliminate the advantages of a streamline refinance.
The changes that the Federal Housing Administration is employing seem to closely emulate decisions that the Government Sponsored Enterprises Fannie Mae and Freddie Mac made previously.
Whether or not this will be a positive thing is yet to be determined.
In this case, the data will have to be compiled before we will be able to create an accurate hypothesis on how these changes will affect borrowers and the housing market alike.