2. Why are the mortgages causing losses to the lenders where there is PMI? (I know some losses are caused by larger than 20% reductions in the foreclosure sale prices in some areas for those loans for which PMI was not required.) Shouldn’t PMI then also help protect the value of the mortgage backed securities and the collateralized debt obligations? With that protection in place, why have the credit default swaps turned out so poorly? Are the issuers of PMI simply being overwhelmed such that the losses significantly exceed the reserves having been established from the PMI premiums paid by the borrowers?

3. Who are the issuers/underwriting companies of PMI? Are they the recipients of bailout money? If so, for the sake of transparency, shouldn’t we know that? How bad off are they? Is there any likelihood of return of any of the money to the taxpayers?"

Private Mortgage Insurance has nothing to do with CDOs or CDS. If a loan goes to default then the MI companies pay a claim to the lender/investor. They do not insure MBSs, they insure individual loans through a flow or bulk basis. Many investors and Wall Street firms went to 2nd liens to avoid MI, thus had no insurance to on these liens. They are currently not eligible for TARP funds and many of the changes that are tightening their guidelines are due to capital constraints. Since, they are insurance companies they are highly regulated on a state-by-state basis. Their reserve requirements are based on a percentage of the coverage of the loan amount i.e $100K loan with 30% coverage would require $7500 in reserves.
The shift to FHA has reduced the new business written by these companies. Once you a drop in the foreclosures and delinquences, you will see these companies lighten some restrictions and make a play for more market share.

MIP IS NOT .5% ANNUALLY!!!

I have been originating these loans for 12 years.
For FHA, MIP is calculated as either 1.5% Upfront (UFMIP) OR 1.75% Upfront (UFMIP) depending on type of loan (FHA purchase, standard FHA refi, OR FHA "streamline" refi) AS WELL AS .50% to .55% MONTHLY MIP.

There is NO SUCH THING AS ANNUAL MIP.

UFMIP can be paid in cash at close OR in most cases it is financed in with the loan amount. Then the borrower pays a reasonable monthly premium. Quite simple.

As of Jan 1st, FHA and lender's internal guidelines NOW loosely consider a borrower's credit risk)

There is obviously some confusion in various terms made by readers, evidenced by some of the comments.

Let me clarify…

MIP (applicable ONLY to FHA) and PMI (applicable to conventional loans) are similar forms of Mortgage Insurance.

These companies are taking huge losses in recent years. Some PMI Mortgage insurance companies are no longer insuring some types of properties (i.e. investor) and ALSO no longer insuring borrowers who have less than a 680 credit score due to risk. MIP has incrased it's upfront and monthly premiums as well. The companies are adjusting to risk and losses.

While the mainstream media, many Americans, and even the government are currently pointing fingers at the mortgage industry and blame the big banks for this economic mess, the REAL truth is that we can thank Congress and several former presidential administrations who felt that every American was ENTITLED to own a home regardless of their ability to repay the debt and their level of credit worthiness. This dates back to Jimmy Carter era.
The "Subprime channel" was further pushed by the Clinton administration and folks like Barney Frank.

FACT IS… CONGRESS FORCED BANKS to loosen their lending standards.

As an originator thru two administrations, I have seen it all. If a borrower approached me several years ago who had clearly demonstrated poor credit, a general lack of resposibility towards use of credit AND A program existed within my portfolio, whereby it would ALLOW this borrower to purchase a home with no poor credit and even no money down, (even though I KNEW they were a bad risk), I still had to perform the loan at the risk of getting SUED for DISCRIMINATION!!!

Nice laws, Huh???

I think the FHA program is outstanding, my only issue is that the FHA lending limit has actually been "decreased" in many markets over the last year and is now (in many cases) well below the conforming loan limit of $417k. There are very few areas in the country that have been granted the higher lending limits and many of these are in the hardest hit areas of the country where the need for a housing rebound is most desperate.

If the federal gov't really wants to "spark" the economy they need to increase the conforming loan limits across the board as promised in early 2008 and they need to increase the FHA lending limit as well. This will allow people in the hard hit areas of California, Florida and the Northeast to be able to qualify for lending programs with competetive interest rates (as jumbo rates are often 2% pts + higher than conforming rates)

Originating quality loans is critical to the success of any mortgage entity and the FHA is no exception. Collectively, we must make every effort to eliminate improperly originated, underwritten and/or serviced loans, or related fraudulent activities.

FHA continues to introduce proactive measures to appropriately manage its risk. Recently, FHA reactivated its Special Work Assessment Teams (SWAT) to conduct single-focus on-site reviews of lenders whose originations are exhibiting signs of distress.

HUD must hold mortgagees accountable for their lending practices in order to protect the public trust and the FHA Insurance Fund. The Department expects each mortgagee to exercise the same level of care in originating, underwriting and servicing an FHA-insured mortgage as it would for a loan in which the mortgagee would be entirely dependent on the property as security to protect its investment. When a mortgagee fails to comply with HUD’s policies and procedures, HUD will take the appropriate action. For example, lenders that materially violate FHA program statutes, regulations and handbook requirements may be referred to the Mortgagee Review Board for appropriate sanctions, which may include termination of mortgagee approval.
The Department urges you to review your company's procedures to ensure that your organization is in full compliance with all FHA requirements. While not an exhaustive list, it is imperative that you ensure your organization:
• implements and maintains a comprehensive quality control plan,
• reviews all loans with early payment defaults;
• does not engage in false or misrepresentative advertising;
• fully documents the stability and amount of borrower(s) income; and,
• does not charge excessive and unallowable fees to the borrower.

FYI, some pos news on FHA viabililty

Subject: Potomac Partners Update: FHA Budget Testimony & Mortgagee Letter on Monitoring

We would like to update you on the following:

• Secretary’s Testimony on FHA Budget

At the FHA budget hearing yesterday, Secretary Donovan outlined his objectives for FHA going forward. Here is the link to his entire testimony. (http://www.hud.gov/offices/cir/test090402.cfm ) Some of the highlights are:

1. Despite concern about FHA’s financial status, the Secretary assured the industry that “FHA insurance is reliable as ever” and “FHA has indefinite resources” to honor its obligations.

He raised the concern that FHA may need additional government funds (i.e. bailout) on which the press will likely focus. However, the Secretary also said the following:
“Since FHA insurance is backed by the full faith and credit of the United States government, I want to assure the market participants that FHA insurance is as reliable as ever and there is no possibility of FHA "running out of money." Under authority provided to all federal loan programs, FHA has indefinite resources to honor its outstanding commitments.”
2. The Secretary acknowledged that industry actions have improved the credit quality of FHA loans. The Secretary said:

“FHA has been attracting better quality borrowers in the last year. With much tighter underwriting standards in the private market, more higher quality borrowers can't qualify for conventional financing and end up with FHA-insured loans. Credit scores for new borrowers grew sharply in 2008, averaging over 680 at the end of 2008, compared to prior year averages of around 640.”

3. Secretary’s and FHA Commissioner’s (Dave Stevens has been nominated) agenda
“In summary, I want to assure the Committee that while significant challenges exist, the FHA is prepared to meet these challenges head on. I'm looking forward to having David Stevens confirmed and take the reins at FHA.
“ Together we are committed to an ambitious reform agenda:
• modernizing FHA's core technology systems;
• enhancing our business practices;
• ferreting out fraud among borrowers and lenders;
• fixing and scaling up the Hope for Homeowners refinance program for "underwater" borrowers;
• revamping FHA loan modification efforts to reduce foreclosures;
• stimulating new energy efficiency mortgage products into the market, and
• restoring FHA to a respected position of leadership in the marketplace.”
While we do not have details, we were particularly interested in the 4th item (fixing and scaling up the Hope for Homeowners refinance program for "underwater" borrowers). This change could open up the H4H Program to millions of borrowers and also enable non-servicing lenders to participate in the program. Just yesterday, Martin Feldstein, noted economist and former Chairman of Council of Economic Advisors, indicated that 1/3 of mortgages are now also “underwater”.
• HUD Mortgagee Letter 2010-12: Mortgagee Monitoring

To coincide with the Secretary’s testimony, HUD published a mortgagee letter yesterday (see below) that reminded lenders of FHA’s risk management practices. There are no new policies contained in the letter. FHA has also started “SWAT” reviews of lenders with higher default rates focusing particularly on direct lending originations. It was likely developed in reaction to the Washington Post article and criticism of FHA’s risk management practices.

The letter states:

“The Department urges you to review your company's procedures to ensure that your organization is in full compliance with all FHA requirements. While not an exhaustive list, it is imperative that you ensure your organization:

• implements and maintains a comprehensive quality control plan,
• reviews all loans with early payment defaults;
• does not engage in false or misrepresentative advertising;
• fully documents the stability and amount of borrower(s) income; and,
• does not charge excessive and unallowable fees to the borrower.”

Brian Chappelle
Partner
Potomac Partners
2127 S. Street N.W.
Washington D.C. 20008
202-637-7020

Mortgagee Letter 2009-12

1. Why have we not heard more about PMI and its role in the current housing and financial crisis?

2. Why are the mortgages causing losses to the lenders where there is PMI? (I know some losses are caused by larger than 20% reductions in the foreclosure sale prices in some areas for those loans for which PMI was not required.) Shouldn’t PMI then also help protect the value of the mortgage backed securities and the collateralized debt obligations? With that protection in place, why have the credit default swaps turned out so poorly? Are the issuers of PMI simply being overwhelmed such that the losses significantly exceed the reserves having been established from the PMI premiums paid by the borrowers?

3. Who are the issuers/underwriting companies of PMI? Are they the recipients of bailout money? If so, for the sake of transparency, shouldn’t we know that? How bad off are they? Is there any likelihood of return of any of the money to the taxpayers?

Not necessarily. Lake County, IL where I live is only projected to decline 1.7%. I bought the house for 7% less than what the current owner paid for it in 2003, and 8% less than their lowered asking price (23% less than it's highest value in '06/'07/'08). Now factor in 3.5% down on top of all of that and I fail to see where 3.5% down is a problem. Heck, I'd be MORE willing to walk away if I had LOST a 20% down payment. That real, hard cash that I had in my hands is GONE. The only time that I'm out any 'real' money now is if prices do decline far enough to where I am under water and I need to sell. I'm prepared to be under water a little. Anybody that buys now should expect their home to lose SOME value. But given enough time, that value will come back.

It does alarm me that FHA gives loans to people with less than 700 scores, and that they allow people who have DTI of 40+% to still get the loan. For people like me who have been smart with their money, have little/no debt, and are buying a home they can truely afford, FHA is a God send. However, if they are going to give loans to people who have shaky credit histories and are buying homes way out of their affordable range, then FHA is no different than the banks offering sub prime loans from 2 years ago.

I have been doing FHA loans for 20 years and i wish Reporters would get ther facts correct

I agree. In the event people do go underwater due to the 3.5% downpayment, at least the payments are super low.

However, when people buy a home worth 750k, you cannot say the same thing. The problem with current FHA is the COMBINATION of low downpayment (high probability of being underwater) and high loan limits. That is a recipe for disaster.