No Rhyme, No Reason, FNMA/FHLMC & FHA Play Politics

Mortgage programs that make a lot of sense are rendered basically useless by unpublished and unofficial modifications.

MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN

A quick update on my recent “Spank Your Bank” post, which has been one of my most commented posts ever.  In no way did I mean to imply that the average worker at large banks should be held accountable for the cowardly/greedy actions of those in top management. 
Also, most smaller regional and community banks weren’t meant to be implied targets.  They are actually alternatives to the “too big to fail” elitist banks.
Nonprofits in Dire Need of Help
Before I get into the post I wanted to introduce my audience to two wonderful Detroit based nonprofits that could use your help.  Before you go hiding your wallet, Mariners Inn and Blight Busters are not asking for money (although they could always use more).  They’re both looking for donations of supplies and volunteers.
Mariners Inn is looking for auction items for its 21st annual River Rhythm fundraising event at the Roostertail on November 6.
Blight Busters needs office equipment and supplies.  They could also use volunteers to help redesign their website and build a social media presence.
Check them out, they’re both struggling to do great things in Detroit in the face of reduced government and corporate funding.
Of Politicians and Programs
By now, thousands of homeowners should be benefiting from refinances that allow them to lower their payments.  Lower payments mean fewer foreclosures, which supposedly is the goal of the Obama administration and many state governments.
This is one of the reasons that FNMA/FHLMC now offers programs that allow a homeowner to refinance even if they owe more than their home is worth.
FNMA/FHLMC already holds the mortgage and the corresponding inherent risk of any default by the homeowner, so why not lower that risk by allowing the homeowner to refinance to a lower payment?  Makes too much sense not to do!
HUD’s allowed that option on FHA loans for over 20 years with its Streamline Refinance program that didn’t require an appraisal or proof of income.
All that’s changing now.
HUD recently announced changes to its Streamline Refinance program effective November 18th, that will require homeowners to pay their closing costs or get an appraisal.  Also, a lender must certify employment and income, which means lenders will verify it.
FNMA/FHLMC’s first upside down refinance program worked pretty well.  It allowed a homeowner to refinance up to 105% of their property’s value with only a slight bump in the going interest rate.
They later rolled out a program allowing refinances on homes up to 125% upside down.  This program has a dismal track record though, as FNMA/FHLMC requires such a high risk premium (higher interest rate) that for most homeowners, the program doesn’t make sense. 
So, we’ve got potentially great programs that President Obama and many politicians point to as evidence they’re doing all the can to help struggling homeowners, when in reality the programs are set up for failure behind the scenes. 
I doubt anyone on Obama’s team has ever taken the time to do the math and analyze how these programs  work.  If they did, they’d quickly see how useless they were.
The most glaring example of this undercover manipulation of the lending system is FHA and credit scores.  Search all you want at HUD.gov, you won’t find anything in writing about the requirements of credit scores to be eligible for an FHA mortgage.
As I write this post though, most lenders now require a minimum credit score of 620 to qualify for an FHA mortgage.  Several have recently bumped that requirement up to 640.
What gives?
HUD is passing on it’s dirty work to lenders to avoid political backlash that’s what.  If HUD came out and publicly stated they were now requiring minimum credit scores, the political response would cost several HUD officials their jobs.  But, these same officials are also being grilled by politicians and Wall Street about HUD’s increasing mortgage delinquencies.  Fear is growing that the FHA program may need a federal bailout.  That won’t sit well with anyone, but leaves HUD officials between a rock and a hard place.  The only way to slow delinquencies and avert a bailout of the program is to do less riskier lending – but, that’s unpopular too. 
Politicians want votes, they don’t want to understand problems like this and have to make a decision that could hurt their career.
So, politicians are indirectly forcing HUD officials into a solution that “unofficially” puts pressure on lenders for doing loans with credit scores under 620. 
Since there’s no official announcement, no one has to take the blame for an unpopular course of action.  No one’s held accountable either. 
Avoiding accountability seems to be a popular survival strategy these days.  Unfortunately, it just leads to mediocrity or worse.
My Week Ahead
Tomorrow, barring a last minute cancellation, I’m supposed to have lunch with Senator John Pappageorge to discuss the housing crisis in Michigan and my thoughts on possible solutions.  I was quite surprised when his office called me about this.
Tuesday I’ll be having lunch with Jeff Ivory, a financial planner who’s made several recent appearances on CNBC’s Squawk Box.  Later I’m also getting together with a Leon Labrecque, a CPA and planner.
Thursday I hope to pop into LBN’s Fall Mixer and then head over to the Troy Chamber of Commerce’s Golden Anniversary event.
Friday morning I hope to attend Gerry Weinberg’s President’s Club.