- The Washington Times - Friday, April 25, 2008

The new limits for loans guaranteed by the Federal Housing Administration (FHA) in high-cost areas have finally been implemented and are available through various banks and mortgage brokers.

Unlike the so-called “conforming jumbo” loans offered by government-sponsored Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac), the FHA jumbo loans may indeed help a lot of homeowners in the Washington metropolitan area. Fannie Mae and Freddie Mac are purchasing loans up to $729,750.

Many in the business thought the move would reduce jumbo rates to existing conforming loan rates. In fact, the rates on jumbo conforming loans remain at least a percent higher than current jumbo rates. Expect to pay 7 percent or more for such a program.

Since Fannie Mae and Freddie Mac require at least 10 percent equity and good credit, most homeowners with jumbo loans cannot benefit from a refinance because the offered rates are too high.

However, the new limits offered on FHA loans carry reasonable rates and have far more lenient underwriting guidelines. In the past, the loan limits prevented most folks in the Washington area from taking an FHA loan because of the high cost of real estate. Let’s take a look at some of the features offered by a particular FHA lender. These apply to FHA jumbo loans in excess of $417,000.

m Only 3 percent down payment required for a purchase price up to $752,000.

m For refinances, 85 percent loans are allowed for cash out.

m Minimum credit score of 620.

m Total monthly debt, including the mortgage payment and monthly payments on consumer loans can be as high as 43 percent of the borrower’s gross monthly income.

m As of this writing, a 30-year fixed rate would run in the range of 6.50 percent with no points.

Compare this with the Fannie/Freddie jumbo conforming guidelines:

m Minimum 10 percent down payment.

m Minimum credit score of 700 in most situations.

m Interest rates at least a half percent higher than the FHA jumbo loans — 7 percent or higher.

It appears that FHA is indeed stepping in to fill the void of the now nonexistent subprime mortgage market. Is this a good thing?

I don’t know. Perhaps in some ways. While I, as an owner of a mortgage company for the last 16 years, never engaged in subprime lending, I can tell you that I have closed a few FHA refinance transactions recently that have saved my borrowers a lot of money. Here’s one example:

A South Carolina couple carries two mortgages: a first trust of $160,000 at 8.25 percent and a second trust of $35,000 at 10.25 percent. The property appraises for $220,000, $20,000 more than the original purchase price three years ago. They apply for a $207,000 loan to consolidate the two mortgages and obtain about $7,000 in cash to pay off some high-interest credit card debt. Cash flow is tight, and their credit score is 630 — not so good.

The loan is approved at 6.25 percent with no points. Not only does the interest rate drop considerably, their monthly payments drop by almost $400 per month. In this weird mortgage market, only an FHA program would approve such an application.

What’s the downside? Well, for those who have read my column over the years, you will know that I’m not a fan of mortgage refinancing that carries high sunken fees. FHA loans, unfortunately, carry an unavoidable 1.50 percent Mortgage Insurance Premium that’s added to the loan amount. There is also a ½ percent annual charge that’s added to the monthly payment. So it’s pretty hard to grab an FHA loan without costs.

But for those folks who are stuck in a high-rate subprime loan, it’s certainly worth investigating an FHA refinance, even if your credit hasn’t improved. A good loan officer can make a recommendation as to what, if anything, should be done.

For folks living in high-cost areas, such as the District, FHA has increased their limits without a significant increase in the rate — unlike Fannie Mae and Freddie Mac. Time will tell if this particular government effort will actually trickle down and benefit the American consumer. So far, any trickle has dried up before it reached us.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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