Seeking to reduce paperwork and hassle, the U.S. Department of Housing and Urban Development has streamlined the FHA mortgage origination process by implementing a new lender insurance program, allowing home buyers to fold up to $35,000 in house repairs into their mortgages, and doing away with specialized appraisals previously required.
The changes are the first of many and the FHA will consider additional changes recommended by real estate agents and lenders, Brian Montgomery, assistant secretary for housing at HUD, said in October.
FHA loans were invented to make it easier for people who might not otherwise qualify to buy a house – those with bad credit ratings or other problems. As house prices have soared in many markets around the country, some buyers find it increasingly difficult to qualify for traditional loans. FHA loans offer an alternative, but the time-consuming procedures and paperwork involved have discouraged their use.
“FHA was set up originally to play a critically important role in the American housing market, to serve as an innovator, and help underserved families,” Brian Montgomery, assistant secretary for housing at HUD, said in October.
But FHA has fallen behind in its mission, he said, and that is not acceptable. HUD hopes to get more borrowers to use FHA loans by streamlining the process.
The new lender insurance program, announced in October, enables high-performing lenders to endorse FHA mortgage loans for insurance without a pre-endorsement review by HUD. The new home repair program, announced in June, initially allowed homeowners to fold up to $15,000 in repairs into their mortgages, among other things. The limit was later upped to $35,000.
The new appraisal program, announced in September, eliminates two of HUD’s appraisal-related forms and updates its appraisal protocol. FHA is adopting four of Fannie Mae’s recently revised appraisal reporting forms, which are now considered the industry standard.
While the number of other types of loans has jumped, FHA loans fell off slightly between 1999 and 2003. In 1999, of the approximately 68.8 million owner-occupied units in the United States, 5.4 million had FHA loans as their primary mortgage, compared to 28.2 million with loans other than FHA, or VA, according to the U.S. Census Bureau.
In 2003, the number of “other” loans had jumped to 32.5 million, while the FHA loans fell to 5.3 million.
Cumbersome, time-consuming procedures and paperwork are to blame, industry experts say.
For example, before the changes, lenders had to mail every scrap of paperwork in the transaction via paper case binders to regional HUD centers for a pre-endorsement review before loans were insured.
“It was a paper-intensive and almost wholly inefficient process,” said Tim Doyle of the Mortgage Bankers Association.
Other changes include changing the appraisal process. Specialized FHA appraisals often required a laundry list of repairs that often delayed settlement or killed the transaction.
FHA will no longer impose unnecessary repairs or require inspections not customary for an area, HUD’s Montgomery said at the end of October.
Doyle said that in moving in this direction, the FHA is trying to address inefficiencies and the perception by real estate agents and originators that the FHA process is cumbersome and has a lot of additional requirements that make it difficult to move quickly to closing.
Wells Fargo Home Mortgage, the country’s largest FHA lender, participated with HUD in a pilot procedure testing of the new lender insurance program and company executives are excited about results so far.
“The e-Endorsement pilot is an innovative change to the FHA insuring process, which has the potential to bring tremendous benefits to our operation,” said Jeff Roy, vice president of government insuring at Wells Fargo Home Mortgage, the country’s largest FHA lender, about one of the changes.
Not everyone in the industry shared his enthusiasm. Mitch Grashin, a loan broker in Oakland, Calif., along with Frances Flynn Thorsen, a Pennsylvania Realtor who has worked with Housing and Urban Development federal home loan programs for more than 10 years, and Ann Biddell, a Hayward, Calif., Realtor, said they view the changes as minor and not having a major impact on the FHA program as a whole.
“I guess they can get approved a little bit easier,” said Grashin. “It’s a minor issue.”
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