FHA puts floor on borrower credit eligibility, by CHRISTINE RICCIARDI, Housingwire.com

Borrowers with credit scores less than 500 are not eligible for Federal Housing Administration-insured mortgage financing, according to the new credit score and loan-to-value (LTV) requirements released today by the U.S. Department of Housing and Urban Development.

This is the first time the FHA has had a minimum score to determine borrower eligibility.

Borrowers with a credit score between 500 and 579 can receive up to 90% LTV  from FHA for a single-family mortgage while any borrower with a score 580 or above is eligible for maximum funding. Non-traditional and insufficient credit is accepted provided that borrowers meet the underwriting guidelines.

100% financing is available to borrowers using Mortgage Insurance for Disaster Victims with no downpayment, as long as their credit score is above 500.

The FHA said it is providing a special, temporary allowance to permit higher LTV mortgage loans for borrowers with lower decision credit scores, so long as they involve a reduction of existing mortgage indebtedness pursuant to FHA program adjustments.

The credit standards will take effect on Oct. 4.


WASHINGTON – In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. Originally announced in March, these changes and other programs that have been put in place will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.

“We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” said FHA Commissioner David H. Stevens. “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”

Today, FHA published a mortgagee letter to provide guidance to lenders on how to implement this new enhancement. Participation in FHA’s refinance program is voluntary and requires the consent of all lien holders. To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner’s primary residence. And the borrower’s existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower’s combined loan-to-value ratio to no greater than 115%.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent. Interested homeowners should contact their lenders to determine if they are eligible and whether the lender agrees the write down a portion of the unpaid principal.

To facilitate the refinancing of new FHA-insured loans under this program, the U.S. Department of Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishment of the liens. To be eligible, servicers must execute a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.

For more information on FHA Short Refinance option, read FHA’s mortgagee letter.

Mortgage Comparison Shopping May Get Easier, thetruthaboutmortgage.com

The Federal Reserve has proposed a new rule that may make it easier for prospective homeowners and those looking to refinance shop around before making a commitment.

The proposal, which was part of a 930-page document published mid-month in the Federal Register, would allow consumers to cancel mortgage applications within three days and get refunded for certain costs.

Things like application fees and appraisal fees would be refundable, while credit report fees would not.

Mortgage shoppers would be entitled to refunds if they canceled an application within three business days of receiving key disclosures, including the Good Faith Estimate and Truth in Lending Act statement.

The Fed believes such a rule would help consumers shop for the best deal, instead of being locked in with one mortgage lender for fear of losing any up-front costs.

But many lenders believe the rule will have little effect, as most already wait several days before charging any fees.

Others are concerned it could delay an already backed-up process, as there will be a waiting period before anything is acted upon or ordered.

Although, it’s not uncommon for a loan to be “on hold” until it makes it through underwriting and receives a formal decision.

It’s unclear how the rule would affect mortgage brokers, those who work on behalf of banks directly with consumers.

A recent Bankrate.com study found that mortgage closing costs rose more than 36 percent this year, with loan origination fees rising nearly 25 percent and third-party fees jumping almost 50 percent.

Lenders won’t have to run a second full credit check before closing on mortgage, by Kenneth R. Harney, Washington Post

Despite earlier reports to the contrary, it turns out that your mortgage lender will not have to pull a second full credit report on you hours before closing on your home purchase or refinancing.

In a clarification of a policy announced earlier this year, mortgage giant Fannie Mae now says that applicants will need to come clean about any debts they have incurred since they submitted their mortgage application — or debts they never disclosed on the application. But a formal pre-closing credit report will not be mandatory to confirm creditworthiness.

Instead, loan officers can use other techniques to verify that you haven’t financed a new car, taken out a personal loan or even applied for new credit in any amount that might make it more difficult for you to afford your monthly mortgage payments.

Among the techniques Fannie expects lenders to use on all applicants: commercial or in-house fraud-detection systems are capable of tracking applicants’ credit files from the day their loan request is approved to closing.

Although Fannie made no reference to specific services in its recent clarification letter to lenders, some commercially available programs claim to be able to monitor mortgage borrowers’ credit activities on a 24/7 basis, flagging such things as inquiries, new credit accounts and previous accounts that did not show up on the credit report that was pulled at the time of initial application.

One of those services is marketed by national credit bureau Equifax and dubbed “Undisclosed Debt Monitoring.” Aimed at what Equifax calls “the quiet period” between application and closing — often one month to three months — the system is “always on,” the company says in marketing pitches to mortgage lenders.

Home loan applicants failed to mention — or loan officers failed to detect — “up to $142 million in auto loan payments” during mortgage underwriting in first mortgage files reviewed by Equifax last year alone, according to the credit bureau. Those loan accounts had average balances of $361 per month — more than enough to disqualify many borrowers on maximum debt-to-income ratio standards required by Fannie Mae, Freddie Mac and major lenders.

Why the sudden concern about new debts incurred after mortgage applications? It’s mainly because Fannie and others have picked up on a key type of consumer behavior that has helped trigger big losses for the mortgage industry in recent years: Some buyers and refinancers hold off on creating new credit accounts until they have cleared strict underwriting tests on the debt-to-income ratios and have been approved for a loan. Then they splurge.

Additional debt loads can run into the tens of thousands of dollars, executives in the credit industry say. Had those new accounts been in their credit files during the application process, borrowers might have been turned down for the mortgage, required to make a larger down payment or charged a higher interest rate.

Fannie’s new policy puts the burden of detecting these debts squarely on lenders or loan officers. Whether they pull additional credit reports — still an option allowed under the revised policy — or use some form of monitoring service, lenders must guarantee that the debt loads stated in any mortgage package submitted for purchase by Fannie Mae are scrupulously accurate as of the moment of closing. If not, the lender probably will be forced to endure the most painful form of punishment in the financial industry: a forced “buyback” of the entire mortgage from Fannie Mae.

Billions of dollars in buybacks have been demanded by Fannie Mae and Freddie Mac this year alone — a fact that is likely to make lenders even more eager to conduct some type of refresher credit check or continuous monitoring of all new loan applicants.

What does this mean if you’re planning to finance a home purchase or refinance your existing mortgage into a new loan with a lower interest rate? Tops on the list: Be aware that sophisticated credit surveillance systems are now being used in the mortgage industry.

Next, try not to inquire about, shop for or take on new credit obligations during the period between your application and the scheduled closing. If you seriously want that new loan, keep your credit picture simple — no significant changes, no additions — until you settle on the mortgage.

During the heady days of the housing boom, nobody was looking for debt add-ons before closings. Now they are scanning for them all the time.

Redefault Rates Improve for Recent Loan Modifications, Conference of State Bank Supervisors, csbs.org


State Foreclosure Prevention Working Group August 2010

Memorandum on Loan Modification Performance

Introduction and Summary of Key Findings For over two years, the State Foreclosure Prevention Working Group,

Our data indicate that some recent loan modifications are performing better than loan modifications made earlier in the mortgage crisis. Loans modified in 2009 are 40 to 50 percent (40% – 50%) less likely to be seriously delinquent six months after modification than loans modified at the same time in 2008. This improvement in loan modification performance suggests that dire predictions of high redefault rates may not come true. This positive trend suggests that increased use of modifications resulting in significant payment reduction has succeeded in creating more sustainable loan modifications.

In addition, recent modifications that significantly reduce the principal balance of the loan have a lower rate of redefault compared to loan modifications overall. The State Working Group believes that servicers should strategically increase their use of principal reduction modifications to maximize prospects for success. Only one in five loan modifications reduce the loan amount; in fact, the vast majority of loan modifications actually increase the loan amount by adding servicing charges and late payments to the loan balance.

Finally, while loan modifications have consistently increased over time, the numbers of foreclosures continue to outpace loan modifications. Nearly three years into the foreclosure crisis, we find that more than 60% of homeowners with serious delinquent loans are still not involved in any loss mitigation activity. Furthermore, with the significant overhang of seriously delinquent loans, the State Working Group anticipates hundreds of thousands of foreclosures will occur later this year absent additional improvements in foreclosure prevention efforts.

1 has collected delinquency and loss mitigation data from most of the largest servicers of subprime mortgages in the country. This memorandum looks at trends in loan modifications of nine non-bank mortgage companies servicing 4.6 million loans across the country as of March 2010. 


This memorandum analyzes data submitted by nine servicers providing longitudinal data on loan modification performance. Since the inception of monthly data collection in October 2007, these nine servicers have completed over 2.3 million foreclosures as compared to 760,000 loan modifications. As of March 31, 2010, these servicers report 778,000 borrowers seriously delinquent (60+ days late on mortgage payments).

Impact of HAMP Program on Loss Mitigation Pipeline

As shown in Chart 1, permanent loan modifications dipped in the Spring and Summer of 2009 as servicers transitioned to the federal Home Affordable Modification Program (HAMP). The HAMP program requires a three month trial period. Accordingly, loans that would have been modified immediately in the middle of last year were instead placed into trial repayment plans, which should have become permanent after three months of successful payments from homeowners. For a variety of reasons, servicers have struggled to transition trial plans into permanent loan modifications. As shown in Chart 2 below, it appears that servicers have begun to work through the backlog of trial plans needing conversion to permanent modifications, but servicers’ conversion ratio is still far short of pre-HAMP levels.

Despite the increase in trial modifications, more than six out of ten (62.5%) seriously delinquent borrowers were not involved in any form of loss mitigation efforts. The biggest failure of foreclosure prevention efforts continues to be the inability to engage homeowners in meaningful loss mitigation efforts in the first instance. Beyond the usual factors driving borrower non-response, some reasons for the low involvement of struggling homeowners include mixed messages communicated to struggling homeowners regarding foreclosure and loss mitigation opportunities, a lack of transparency in loss mitigation options and process, inconsistent and confusing information provided to homeowners during the process, poor customer service delivery, and long delays in the modification process.

Type of Modification

The vast majority of loan modifications now involve some reduction in the homeowner’s monthly payment. Of loan modifications tracked by the State Foreclosure Prevention Working Group in the first quarter of 2010, 89.3% involved some reduction in payments, including 77.6% that significantly decreased payments (i.e. decreased by more than 10%). This data is consistent with data for the large national banks covered by the OCC and OTS mortgage metrics report.

While payment reduction is now commonplace, the State Working Group remains concerned over the absence of loan modifications significantly reducing outstanding loan balances. In the first quarter of 2010, only 13.7% of all modifications reported to the State Foreclosure Prevention Working Group involved principal reductions greater than 10%; in fact, 70.4% of loan modifications

increased the unpaid principal balance.3 With home price declines of 30% since 20064 and almost 25% of all homeowners with a mortgage owing more than their home is worth,5 the failure to meaningfully reduce principal limits the success of current foreclosure prevention efforts. The HAMP program has recently introduced a principal reduction alternative to its standard waterfall to give servicers the option of prioritizing the reduction of principal; however, we believe the optional nature of this alternative and its inapplicability to GSE loans will likely significantly limit its impact in the HAMP program.


A loan modification does not guarantee that a borrower will be able to remain current on the mortgage. Even the best-designed loan modification has some risk of redefault; however, a loan modification that fails to address the borrower’s repayment ability and the factors underlying the default may set the homeowner up for failure. Redefault expectations are incorporated into the servicer’s decision whether or not to even offer a loan modification to a struggling homeowner. Therefore, loan modification performance is very important both for the long-run efficacy of the program as well as a factor in determining the universe of eligible borrowers. Some analysts have predicted redefault rates of 65% to 75%.


6 The State Working Group is more optimistic. The reason for our optimism is that loans modified in 2009 are performing substantially better than those modified in 2008, as shown by Chart 4 on the next page.


7 For example, 30.8% of loans modified between August and September in 2008 were seriously delinquent after 6 months, but only 15.3% of loans modified in August and September of 2009 were seriously delinquent after 6 months.8 That amounts to a 50% reduction in the redefault rate.9 The OTS and OCC report a similar reduction. In recent mortgage metrics reports, the OCC and OTS report that 48.1% of loans modified in the third quarter of 2008 were 60 or more days delinquent 6 months after modification,10 but that redefault rate fell by more than 40 percent (to 27.7%) for loans modified in the third quarter of 2009.11

A comparison of five reporting servicers


12 demonstrates how the improvement in redefault rate is evident even when controlling for the type of loan modification. For instance, the redefault rate at six months for loans with significant payment reductions fell from almost 31.4% for loans modified in August to September of 2008 to just 11.8% for loans modified in August to September of 2009, a more than 62% reduction. Similarly, the redefault rate for loans with significant principal reductions fell from 35.4% to 12.9%, over a 63% reduction. While there is understandable fear that loan modification programs may be overused and that they may become less effective in the effort to reach the maximum number of borrowers, our research suggest that servicers’ loss mitigation offers are becoming more successful for those borrowers that are able to secure a loan modification.


While servicer performance is still short of what is needed and the HAMP program has not been a silver bullet, we find that there has been some improvement in foreclosure prevention efforts.

Loan modifications have increased, significant payment reduction is the norm, and loan modification performance is improving. The improved performance of recent vintages of loan modifications validates the policy of offering sustainable loan modifications. We encourage servicers and the Treasury Department to monitor this trend and to adjust redefault expectations in their models as evidence permits. If experience reflects lower redefaults than anticipated, revised adjustments will enable the HAMP and non-HAMP loan modification programs to reach more struggling homeowners.

Despite the progress noted in this memorandum, the number of seriously delinquent loans moving toward foreclosure remains at near all-time highs. As servicers pass through the initial wave of successful HAMP-eligible borrowers, the State Working Group is concerned that many of the currently delinquent loans will accelerate into foreclosure in the second half of the year. The State Working Group believes that unnecessary foreclosures will occur without further efforts and resources of servicers to reach homeowners, and, where appropriate, to offer loan modifications with significant principal reduction. These unnecessary foreclosures will be a needless drag on the recovery of the housing market and will continue to delay a broader economic recovery.



 1. The State Working Group is more fully described in our first report from February 2008, available at: http://www.csbs.org/regulatory/Documents/SFPWG/DataReportFeb2008.pdf. The State Working Group currently consists of representatives of the Attorneys General of 12 states (Arizona, California, Colorado, Florida, Illinois, Iowa, Massachusetts, Nevada, North Carolina, Ohio, Texas, and Washington), three state bank regulators (Maryland, New York and North Carolina), and the Conference of State Bank Supervisors. Data analysis and graphs for this memorandum were prepared by Center for Community Capital, University of North Carolina at Chapel Hill.

2. For the first quarter of 2010, the OCC/OTS reports that over 87% of all loan modifications involve a payment reduction, with 72% reducing payment by more than 10%.


See OCC and OTS Mortgage Metrics Report, First Quarter 2010 (Jun 2010) at p. 33, available at: http://www.occ.treas.gov/ftp/release/2010-69a.pdf.




This is generally consistent with results from the OCC/OTS metrics report. The OCC and OTS report that only 2% of modifications in the fourth quarter of 2009 involved principal reduction, while 82% included the capitalization of missed payments and fees, thereby increasing the amount owed. See OCC and OTS Mortgage Metric Report, infra note 2, at p. 26. The State Working Group notes with some surprise the decline in the percentage of loan modifications with principal reduction for the large national banks and thrifts between 4th quarter 2009 and 1st quarter 2010 (from 7% in 4Q 2009 to 2% 1Q 2010).



The S&P/Case-Shiller National House Price Index fell 32% from its peak in the second quarter of 2006. See S&P/Case-Shiller Home Price Indices: 2009, A Year In Review (January 2010).



First American CoreLogic estimates that more than 11.3 million, or 24%, of all residential properties with mortgages, were underwater at the end of 2009. See Media Alert: Underwater Mortgages On the Rise According to First American CoreLogic Q4 2009 Negative Equity Data (February 2010), available at: http://www.loanperformance.com/infocenter/library/Q4_2009_Negative_Equity_Final.pdf


U.S. RMBS Servicers’ Loss Mitigation and Modification Efforts Update II, Fitch Ratings (Jun 16, 2010)

7 For purposes of this memorandum, redefault is defined as 60+ days late or foreclosed.

8 Due to limited data availability, August and September are the only months for which we have overlapping redefault rates specifically for 6 months after origination; however, a decline is evident with other cohorts. For example, the redefault rate at 9 months for loans modified in May and June fell from 37.4% in 2008 to 26.7% in 2009, a 29% reduction.

9 The decline in default rate has been broadly consistent across all nine servicers. The range of redefault rates six month after modification was 17-46% for loans modified in August and September of 2008 and only 10-25% for those modified at the same time in 2009.


OCC and OTS Mortgage Metrics Report, Fourth Quarter 2009 (Mar 2010) at p. 34, available at: http://www.occ.treas.gov/ftp/release/2010-36a.pdf.


OCC and OTS Mortgage Metrics Report, infra note 2 at p. 36. 12 Note that the redefault rates of loan modifications with payment and principal reductions are based on the 5 (out of the 9 total) servicers who provided performance data on all types of modifications. The overall redefault rate for loans modified in August and September by these 5 servicers was 32.3% in 2008 and 15.2% in 2009.


Conference of State Bank Supervisors