FHA-Insured Home Loans: An Overview

FHA-Insured Home Loans: An Overview Katie Jones Analyst in Housing Policy April 18, 2013January 20, 2015 Congressional Research Service 7-5700 www.crs.gov RS20530 CRS Report for Congress Prepared for Members and Committees of Congress FHA-Insured Home Loans: An Overview Summary The Federal Housing Administration (FHA) was created by the National Housing Act of 1934 in order to broaden homeownership, protect lending institutions, and stimulate the building industry. FHA does not make , an agency of the Department of Housing and Urban Development (HUD), was created by the National Housing Act of 1934. FHA does not make mortgage loans. Rather, it insures mortgage loans made by private lenders lenders against the possibility of borrowers defaulting on mortgages that meet certain underwriting and other criteria, thereby expanding the availability of mortgage mortgage credit beyond what may be available otherwise. If the borrower defaults on the mortgage, FHA will repay the lender the remaining amount owed. While FHA insures a range of mortgage types, including multifamily properties and hospital facilities, this report focuses on FHA’s single-family insurance program. FHA requires a minimum downpayment A household that obtains an FHA-insured mortgage must meet FHA’s eligibility and underwriting standards, including showing that it has sufficient income to repay a mortgage. FHA requires a minimum down payment of 3.5% from most borrowers, which is lower than the downpayment down payment required for most other types of mortgages. FHA-insured mortgages cannot exceed a statutory maximum mortgage amount, which varies by area but and is based on area median house prices but cannot exceed a specified ceiling in high-cost areas. (The ceiling is currently set at $729,750, but is scheduled to fall to $625,500 after December 31, 2013625,500 in high-cost areas.) Borrowers are charged fees, called mortgage insurance premiums, in exchange for the insurance. FHA’s share of the mortgage market tends to vary with economic conditions and other factors. In recent years, due to housing market turmoil and a contraction of private lending, FHA has been insuring morea larger share of mortgages than it had in previous years. Its overall share of the mortgage market increased from about 3% in calendar year 2005 to 21% in 2009, and was about 14% in 2013. In FY2014In FY2012, FHA insured about 1.2 million nearly 800,000 new loans with a combined principal balance of over $200$135 billion. FHA-insured mortgages, like all mortgages, have experienced increased default rates in recent years, leading to concerns about the stability of the FHA insurance fund for single-family mortgages, the Mutual Mortgage Insurance Fund (MMIF). In response to these concerns, FHA has recently adopted a number of policy changes, including changes related to the fees that it charges and its mortgage requirements, policy changes in an attempt to limit risk to the MMIF. These policy changes have included increasing mortgage insurance premiums, instituting a minimum credit score requirement, and raising downpayment requirements for borrowers with lower credit scores. This report briefly discusses the basic features of the FHA program to insure loans on singlefamily homes and describes some recent changes to program requirements changes have included raising the fees that it charges and making changes to certain eligibility criteria for FHA-insured loans. Congressional Research Service FHA-Insured Home Loans: An Overview Contents A Brief History of the FHA Home Loan Insurance Program Introduction.......................................................... 1 Features of the Program ............................................................................ 1 Background ....................................... 1 Eligibility and Underwriting Guidelines .......................................................................................... 1 Maximum Mortgage ..... 1 History .................................................................................................................................... 2 Loan Term... 1 Current Role .............................................................................................................................. 2 Features of FHA-Insured Mortgages ........................................... 4 Downpayment.................................................... 4 Eligibility and Underwriting Guidelines ........................................................................... 4........ 5 Owner Occupancy ..................................................................................................................... 5 Eligible Loan Purposes .............................................................................................................. 5 Mortgage Insurance Fees Loan Term........................................................................................................... 5 Annual Mortgage Insurance Premiums ....................... 6 Interest Rates ............................................................................................................................. 6 Down Payment ................................................................................................ 5 Up-Front Mortgage Insurance Premiums .......................... 6 Maximum Mortgage Amount ............................................................................................. 6 Premium Refunds and Cancellations ....... 6 Mortgage Insurance Fees (Premiums) ................................................................................... 7 Interest Rates .... 8 Options for FHA-Insured Loans in Default ............................................................................. 11 Program Funding ........................................................................................................................... 8 Defaults and Loss Mitigation 12 Program Activity ................................................................................................................ 8 Program Funding ............ 14 Number of Mortgages Insured................................................................................................. 14 Market Share ............................................... 9 Program Activity ............................................................................ 15 Figures Figure 1.FHA’s Share of the Mortgage Market, 2001-2013 ......................................... 10 Tables Table 1. FHA Maximum Mortgage Amounts, through December 31, 2013................. 16 Tables Table 1. FHA Maximum Mortgage Amounts .................................................................................. 48 Table 2. Annual and Up-Front Mortgage Insurance Premiums ....................................................... 7 10 Table 3. Loss Mitigation Strategies ................................................................................................. 9Options................................................................................................... 11 Table 4. Number of New Mortgages Insured by FHA in FY2014 ................................................. 14 Table 5. Number and Dollar Volume of Outstanding FHA-Insured Mortgages in FY2014 .......... 15 Table A-1. FHA-Insured Mortgage Origination Activity............................................................... 17 Appendixes Appendix. FHA’s Market Share Since 2001 .................................................................................. 17 Congressional Research Service FHA-Insured Home Loans: An Overview Contacts Author Contact Information........................................................................................................... 1118 Acknowledgments ......................................................................................................................... 1118 Congressional Research Service FHA-Insured Home Loans: An Overview A Brief History of the FHA Home Loan Insurance Program The Federal Housing Administration (FHA) was created by the National Housing Act of 1934,1 during the height of the Great Depression, to broaden homeownership, shore up and protect home financing institutions, and stimulate employment in the building industry. Prior to the creation of FHA, few mortgages exceeded 50% of the property’s value and most Introduction The Federal Housing Administration (FHA) is an agency of the Department of Housing and Urban Development (HUD) that insures private mortgage lenders against the possibility of borrowers defaulting on certain mortgage loans.1 If a mortgage borrower defaults on a mortgage—that is, does not repay the mortgage as promised—and the home goes to foreclosure, FHA pays the lender the remaining amount that the borrower owes. FHA insurance protects the lender, rather than the borrower, in the event of borrower default; a borrower who defaults on an FHA-insured mortgage will still experience the consequences of foreclosure. In order to be eligible for FHA insurance, the mortgage must be originated by a lender that has been approved by FHA, and the mortgage and the borrower must meet certain criteria. FHA is one of three government agencies that provide insurance or guarantees on certain home mortgages made by private lenders, along with the Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA).2 Of these federal mortgage insurance programs, FHA is the most broadly targeted. Unlike VA- and USDA-insured mortgages, the availability of FHA-insured mortgages is not limited by factors such as veteran status, income, or whether the property is located in a rural area. However, the availability or attractiveness of FHAinsured mortgages may be limited by other factors, such as the maximum mortgage amount that FHA will insure, the fees that it charges for insurance, and its eligibility standards. This report provides background on FHA’s history and market role and an overview of the basic eligibility and underwriting criteria for FHA-insured home loans. It also provides data on the number and dollar volume of mortgages that FHA insures, along with data on FHA’s market share in recent years. It does not go into detail on the financial status of the FHA mortgage insurance fund; for information on FHA’s financial position, see CRS Report R42875, FHA Single-Family Mortgage Insurance: Financial Status of the Mutual Mortgage Insurance Fund (MMI Fund), by Katie Jones. Recent FHA policy changes are discussed in CRS Report R43531, FHA SingleFamily Mortgage Insurance: Recent Policy Changes and Proposed Legislation, by Katie Jones. Background History The Federal Housing Administration (FHA) was created by the National Housing Act of 1934,3 during the Great Depression, to encourage lending for housing and to stimulate the construction industry. Prior to the creation of FHA, few mortgages exceeded 50% of the property’s value and 1 This report addresses FHA’s program for insuring mortgages on single-family homes, which is by far the largest FHA program. However, FHA is also authorized to insure mortgages on a variety of other types of properties, including multifamily buildings and hospitals and other health care facilities. These FHA programs are not discussed in this report. 2 VA provides guarantees on certain home mortgages made to veterans, and USDA insures certain home mortgages made to lower-income households in rural areas. For more information on VA- and USDA-guaranteed mortgages, see CRS Report R42504, VA Housing: Guaranteed Loans, Direct Loans, and Specially Adapted Housing Grants, by Libby Perl and CRS Report RL31837, An Overview of USDA Rural Development Programs, by Tadlock Cowan. 3 The National Housing Act of 1934 is P.L. 73-479, and is codified at 12 U.S.C. 1701 et seq. Congressional Research Service 1 FHA-Insured Home Loans: An Overview most mortgages were written for terms of five years or less. At the end of the five-year term, the remaining loan balance had to be repaid or the mortgage had to be renegotiated. Borrowers generally had little trouble in obtaining new mortgages. During the Great Depression, however, lenders were unable or unwilling to refinance many of the loans that became due. Thus, many borrowers lost their homes through foreclosure, and lenders lost money because property values were falling. Lenders became wary of the mortgage market. FHA institutionalized a revolutionary idea: 20-year mortgages on which the loan would be completely repaid at the loan term. If borrowers defaulted, FHA insured that the lender would be fully repaid. Mortgage instruments were standardized, and a new confidence was instilled in the mortgage market. Investment in housing was stimulated, and its ripple effects were felt throughout the economy. Eventually, lenders began to make long-term mortgages without FHA insurance if borrowers made significant downpaymentsdown payments. Over time, 2515- and 30-year mortgages have become standard mortgage products. When the Department of Housing and Urban Development (HUD) was created in 1965, FHA became an agency of HUD. This report discusses the features of the FHA program to insure loans on single-family homes. Single-family homes are defined as properties containing from one to four dwelling units.2 Features of the Program Eligibility and Underwriting Guidelines FHA-insured loans are available to owner-occupants who can demonstrate the ability to repay the loans according to the terms of the contract. In general, parties who have previously defaulted on a mortgage are not eligible for FHA-insured loans for at least three years. FHA-insured loans must be underwritten in accordance with accepted practices of prudent lending institutions and FHA requirements.3 The FHA credit analysis worksheet is used to examine the applicant’s personal and financial status, monthly shelter expenses, funds required for closing expenses, effective monthly income, and debts and obligations. 1 The National Housing Act is P.L. 73-479, and is codified at 12 U.S.C. 1701 et seq. FHA also insures other types of mortgage loans, including mortgages for multifamily properties, nursing homes, and hospitals, but these insurance programs are not discussed in this report. 3 FHA’s underwriting and eligibility requirements can be found in HUD Housing Handbook 4155.1, “Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans,” http://portal.hud.gov/hudportal/HUD?src=/ program_offices/administration/hudclips/handbooks/hsgh/4155.1. 2 Congressional Research Service 1 FHA-Insured Home Loans: An Overview As a general rule, the applicant’s prospective mortgage payment should not exceed 31% of gross effective monthly income. The applicant’s total obligations, including the proposed housing expenses, should not exceed 43% of gross effective monthly income. If these ratios are not met, the borrower should present compensating factors, such as savings history and past credit management.4 Effective October 4, 2010, FHA imposed a minimum credit score requirement of 500 and increased downpayment requirements for borrowers with credit scores below 580.5 See the “Downpayment” section for more information on downpayment requirements for FHA-insured loans. Maximum Mortgage There is no income limit for borrowers seeking FHA-insured loans. However, FHA-insured mortgages cannot exceed a maximum mortgage amount set by law. The maximum mortgage amounts allowed for FHA-insured loans vary by area, and different limits are in effect for onefamily, two-family, three-family, and four-family properties. The limits are subject to a statutory floor and ceiling; the loan limit in a given area cannot be lower than the floor, nor can it be higher than the ceiling.6 The maximum mortgage amounts have been amended several times in recent years. In early 2008, Congress enacted the Economic Stimulus Act of 2008 (ESA, P.L. 110-185), which temporarily increased the maximum mortgage amounts to 125% of area median home prices, with a floor of $271,050 and a high-cost area ceiling of $729,750.7 This temporary increase was enacted in response to tightening lending standards as the mortgage market began to deteriorate. As both lenders and private mortgage insurers tightened their underwriting requirements, fewer borrowers were able to qualify for loans without FHA insurance or other types of guarantees. However, the FHA loan limits prevented some borrowers from being able to purchase a home with an FHA-insured mortgage, particularly in high-cost markets. The increased loan limits allowed more borrowers to qualify for FHA-insured mortgages.8 The Housing and Economic Recovery Act (HERA, P.L. 110-289) established new permanent statutory limits of 115% of area median home prices, with a floor of $271,050 and a high-cost area ceiling of $625,500. These limits were generally higher than the pre-ESA limits, but lower in many cases than the temporary limits established by ESA. However, the American Recovery and 4 See Chapter 4, Section F of HUD Housing Handbook 4155.1 at http://portal.hud.gov/hudportal/documents/huddoc? id=4155-1_4_secF.pdf. 5 U.S. Department of Housing and Urban Development, Mortgagee Letter 2010-29, September 3, 2010, http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-29ml.pdf. 6 The FHA maximum mortgage amounts are codified at 12 U.S.C. §1709(b)(2). The statute allows for special higher limits for Alaska, Hawaii, Guam, and the Virgin Islands. To look up the maximum mortgage amount for a specific area, see HUD’s website at https://entp.hud.gov/idapp/html/hicostlook.cfm. 7 Immediately prior to ESA’s enactment, the limits had been set at 95% of area median house prices, with a ceiling of $362,790 and a floor of $200,160 for a one-unit home. See U.S. Department of Housing and Urban Development, Mortgagee Letter 2008-02, January 18, 2008, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/ administration/hudclips/letters/mortgagee/2008ml. 8 ESA also raised the limit on the size of mortgages that Fannie Mae and Freddie Mac can purchase, known as the conforming loan limit, in high-cost areas. Congressional Research Service 2 FHA-Insured Home Loans: An Overview Reinvestment Act of 2009 (ARRA, P.L. 111-5) amended the maximum mortgage amounts for calendar year 2009, setting them at the higher of (1) the 2008 limits set in ESA, or (2) the original 2009 limits set in HERA. Since the floor is the same under both ESA and HERA, the floor is set at $271,050 under ARRA. Since the high-cost area limit is higher under HERA, the high-cost area limit is set at $729,750 under ARRA.9 Since ESA set the limits for all other areas at 125% of 2007 area median home prices while HERA set the limits at 115% of more current area median home prices, which of these limits is higher will vary by area.10 The ARRA limits that set the maximum mortgage amount at the higher of the ESA or HERA limits have been extended several times, most recently by the Consolidated and Further Continuing Appropriations Act, 2012 (P.L. 112-55), which was enacted after the last extension had expired at the end of FY2011 and the limits briefly fell to their HERA levels. P.L. 112-55 extends the ARRA limits until December 31, 2013. Unless Congress acts to extend the ARRA limits beyond December 31, 2013, the maximum mortgage amounts will revert to their HERA levels at that time, with the ceiling in high-cost areas falling to $625,500 for a one-unit home, and the maximum mortgage amounts falling in some areas between the floor and the ceiling as well. The FHA loan limits in effect until December 31, 2013, are summarized in Table 1. 9 The statutory ceilings and floors are set as a percentage of the Freddie Mac conforming loan limit, not as dollar amounts. Currently, the floor is set at 65% of the conforming loan limit and the ceiling is set at 175% of the conforming loan limit. The Freddie Mac conforming loan limit is currently $417,000, so the floor is $271,050 (65% of $417,000), and the ceiling is $729,750 (175% of $417,000). Prior to the Economic Stimulus Act of 2008 (ESA), the floor was set at 48% of the Freddie Mac conforming loan limit, and the ceiling was set at 87% of the conforming loan limit. Congress can change the ceilings and floors either by 1) changing the percentages of the Freddie Mac conforming loan limit that constitute the ceiling and the floor, or 2) changing the Freddie Mac conforming loan limit itself. 10 FHA calculates area-by-area limits each year based on the prior year’s area median home price data, so the actual limit in a given area can change from year to year. The ESA limits are 125% of 2007 area median home prices. The original HERA limits were 115% of 2008 area median home prices, while current HERA limits would be 115% of the most recent area median home price data available. FHA has followed a policy of not allowing HERA limits to fall relative to the original HERA limits, so if current HERA limits (based on more recent area median home prices) are lower than the original HERA limits (based on 2008 area median home prices), FHA uses the original HERA limits for the purposes of calculating the maximum mortgage amount in that area. For the maximum mortgage amounts in each area for calendar year 2013, see FHA Mortgagee Letter 12-26, “Federal Housing Administration Maximum Loan Limits, Effective Period: January 1, 2013 through December 31, 2013,” http://portal.hud.gov/hudportal/documents/ huddoc?id=12-26ml.pdf. Congressional Research Service 3 FHA-Insured Home Loans: An Overview Table 1. FHA Maximum Mortgage Amounts, through December 31, 2013 Property Size High-Cost Areaa (Upper Limit) 1-family $729,750 The higher of 125% of the 2007 area median home price or 115% of 2008 or later area median home prices $271,050 2-family $934,200 The higher of 125% of the 2007 area median home price or 115% of 2008 or later area median home prices $347,000 3-family $1,129,250 The higher of 125% of the 2007 area median home price or 115% of 2008 or later area median home prices $419,425 4-family $1,403,400 The higher of 125% of the 2007 area median home price or 115% of 2008 or later area median home prices $521,250 Source: P.L. All Other Areas Low-Cost Areab (Lower Limit) 112-55, FHA Mortgagee Letter 11-39, and FHA Mortgagee Letter 12-26 Note: FHA mortgage limits by state, county, and MSA are available at https://entp.hud.gov/idapp/html/ hicostlook.cfm. a. Areas where the higher of 125% of the 2007 area median home price or 115% of 2008 or later area median home prices exceeds 175% of the Freddie Mac limit. The National Housing Act provides that mortgage limits for loans in Alaska, Guam, Hawaii, and the Virgin Islands may be adjusted up to 150% of the statutory ceiling. b. Areas where the higher of 125% of the 2007 area median home price or 115% of the 2008 area median home price is lower than 65% of the Freddie Mac limit. Loan Term FHA-insured mortgages may be obtained with loan terms of up to 30 years. Downpayment FHA requires a lower downpayment than most other types of mortgages. Under changes made by the Housing and Economic Recovery Act of 2008 (HERA, P.L. 110-289), borrowers are required to contribute at least 3.5% in cash or its equivalent to the cost of acquiring a property with an FHA-insured mortgage. (Prior law had required borrowers to contribute at least 3% in cash or its equivalent.) Amounts borrowed from a family member are considered as cash for this purpose. Prohibited sources of the required funds are the seller or any entity that financially benefits from the transaction, or any third party that is directly or indirectly reimbursed by the seller or by anyone that would financially benefit from the transaction.11 HUD has interpreted the 3.5% cash contribution as a downpayment requirement and has specified that contributions toward closing costs cannot be counted toward it.12 11 For more information on seller-funded downpayment assistance programs and FHA, see CRS Report RS22934, Treatment of Seller-Funded Downpayment Assistance in FHA-Insured Home Loans, by Bruce E. Foote. 12 U.S. Department of Housing and Urban Development, Mortgagee Letter 2008-23, September 25, 2008, http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_19737.pdf. Congressional Research Service 4 FHA-Insured Home Loans: An Overview FHA guidelines put in place beginning on October 4, 2010 require a 10% downpayment from borrowers with credit scores between 500 and 579, while borrowers with credit scores of 580 or above are still required to make a downpayment of at least 3.5%. FHA no longer insures loans made to borrowers with credit scores below 500.13 Owner Occupancy Generally, for loans closed on or after December 15, 1989, borrowers must intend to occupy the property as a principal residence. Property that has been acquired by FHA as a result of default or foreclosure may be sold to owner-occupants or investors, and in some cases the borrowers may obtain FHA-insured loans. Eligible Loan Purposes FHA-insured loans may be used to purchase one-family detached homes, townhomes, rowhouses, two- to four-family buildings, manufactured homes and lots, and condominiums in developments approved by FHA.14 FHA-insured loans may also be obtained to build a home; to repair, alter, or improve a home; to refinance an existing home loan; to simultaneously purchase and improve a home; or to install a solar heating and cooling system or other weatherization improvements. Mortgage Insurance Fees Borrowers of FHA-insured loans pay an up-front mortgage insurance premium (MIP) and annual mortgage insurance premiums. These premiums are set as a percentage of the loan amount. The maximum amounts that FHA is allowed to charge for the annual and the upfront premiums are set in statute. However, since these are maximum amounts, HUD has the discretion to set the premiums at lower levels. Annual Mortgage Insurance Premiums In August 2010, President Obama signed P.L. 111-229, which raised the maximum annual mortgage insurance premium that FHA can charge. The amount of the maximum annual premium varies based on the loan’s initial loan-to-value ratio: (1) if the loan-to-value ratio is 95% or higher, the maximum annual premium is 1.55% of the loan balance; (2) if the loan-to-value ratio is less than 95%, the maximum annual premium is 1.5% of the loan balance.15 FHA has increased the actual premiums it charges several times in recent years as a way to bring more money into the FHA insurance fund.16 As of April 1, 2013, FHA is charging 1.35% of the 13 U.S. Department of Housing and Urban Development, Mortgagee Letter 2010-29, September 3, 2010, http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-29ml.pdf. 14 Particular requirements that apply to FHA insurance of manufactured housing, condominium, and co-op loans are described in FHA Mortgagee Letters, which are available at http://www.hud.gov/offices/adm/hudclips/letters/ mortgagee/. 15 These annual mortgage insurance premiums apply for mortgages with loan terms that exceed 15 years. Mortgages with loan terms of 15 years or fewer are subject to lower annual mortgage insurance premiums. 16 Most of the changes to the mortgage insurance premiums in recent years have been made administratively by FHA, (continued...) Congressional Research Service 5 FHA-Insured Home Loans: An Overview loan balance for mortgages where the loan-to-value ratio is above 95%, and 1.30% of the loan balance for mortgages where the loan-to-value ratio is 95% or below.17 This premium applies to most single-family mortgages.18 Since June 11, 2012, FHA has also charged a higher annual mortgage insurance premium on loans with a principal balance that exceeds $625,500. Currently, for loans above this amount, the annual mortgage insurance premium is 1.55% for mortgages with a loan-to-value ratio above 95%, and 1.50% for mortgages with a loan-to-value ratio of 95% or below. The maximum mortgage amount that FHA would have been allowed to insure in high-cost areas would have been $625,500 if the maximum mortgage amounts had remained at their HERA levels. However, since previously higher maximum loan amounts were reinstated, the maximum mortgage amount that FHA can insure in high-cost areas is $729,750. (See the “Maximum Mortgage” section for more information on the recent history of the maximum mortgage amounts.) Up-Front Mortgage Insurance Premiums HERA increased the maximum up-front mortgage insurance premium that FHA is permitted to charge to 3% from 2.5% of the mortgage amount for a borrower who has not received homeownership counseling, and to 2.75% from 2% of the mortgage amount for a borrower who has received homeownership counseling. Currently, FHA is not charging different up-front premiums to borrowers who do and do not receive homeownership counseling. As of April 9, 2012, HUD has set the up-front premium at 1.75% of the loan amount, whether or not the borrower received homeownership counseling.19 This premium applies to most singlefamily mortgages.20 Table 2 shows the annual and up-front mortgage insurance premiums that are currently in effect. (...continued) although the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78), enacted on December 23, 2011, required FHA to increase the annual mortgage insurance premium it charges by 10 basis points (one-tenth of one percentage point). 17 U.S. Department of Housing and Urban Development, Mortgagee Letter 13-04, “Revision of Federal Housing Administration (FHA) Policies Concerning Cancellation of the Annual Mortgage Insurance Premium (MIP) and Increase to the Annual MIP,” January 31, 2013, http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf. FHA charges lower annual premiums for mortgages with terms of 15 years or less. 18 These premium changes do not apply to certain FHA programs, including Title I loans and Home Equity Conversion Mortgages (HECMs). Furthermore, as of June 11, 2012, FHA decreased the annual mortgage insurance premium to 0.55% of the loan amount for streamline refinance transactions where the original loan was endorsed on or before May 31, 2009. 19 U.S. Department of Housing and Urban Development, Mortgagee Letter 12-4, “Single Family Mortgage Insurance: Annual and Up-Front Mortgage Insurance Premiums – Changes,” March 6, 2012, http://portal.hud.gov/hudportal/ documents/huddoc?id=12-04ml.pdf. 20 The premium changes do not apply to certain FHA programs, including Title I loans and Home Equity Conversion Mortgages (HECMs). Furthermore, as of June 11, 2012, FHA decreased the up-front mortgage insurance premium to 0.01% of the loan amount for streamline refinance transactions where the original loan was endorsed on or before May 31, 2009. Congressional Research Service 6 FHA-Insured Home Loans: An Overview Table 2. Annual and Up-Front Mortgage Insurance Premiums As of April 1, 2013 Annual Premium Up-Front Premium LTV <= 95% 1.30% 1.75% LTV > 95% 1.35% 1.75% LTV <=95% 1.50% 1.75% LTV > 95% 1.55% 1.75% Principal balance at or below $625,500 Principal balance above $625,500 Source: FHA Mortgagee Letter 12-4 and FHA Mortgagee Letter 13-04. Notes: These premiums apply to most FHA-insured single-family loans, with certain exceptions (such as certain streamline refinance transactions and FHA-insured reverse mortgages). Lower annual premiums are charged for mortgages with a loan term of 15 years or fewer. Premium Refunds and Cancellations In the past, if borrowers prepaid their loans, they may have been due refunds of part of the upfront insurance premium that was not “earned” by FHA. The refund amount depended on when the mortgage closed and declined as the loan matured. The Consolidated Appropriations Act 2005 (P.L. 108-447) amended the National Housing Act to provide that, for mortgages insured on or after December 8, 2004, borrowers are not eligible for refunds of up-front mortgage insurance premiums except when borrowers are refinancing existing FHA-insured loans with new FHAinsured loans. After three years, the entire up-front insurance premium paid by borrowers who refinance existing FHA-insured loans with new FHA-insured loans is considered “earned” by FHA, and these borrowers are not eligible for any refunds.21 The annual mortgage insurance premiums are not refundable. Beginning with loans closed on or after January 1, 2001, FHA had followed a policy of automatically cancelling the annual mortgage insurance premium when, based on the initial amortization schedule, the loan balance reached 78% of the initial property value.22 However, for loans insured on or after June 3, 2013, FHA will continue to charge the annual mortgage insurance premium for the life of the loan for most mortgages.23 This change is in response to concerns about the financial status of the FHA insurance fund. FHA has stated that, since it continues to insure the entire remaining mortgage amount for the life of the loan, and since premiums were cancelled on the basis of the loan amortizing to a percentage of the initial property value rather than the current value of the home, FHA has had to pay insurance claims on defaulted mortgages where the borrowers were no longer paying annual mortgage insurance premiums.24 21 FHA Mortgagee Letter 05-03, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/ administration/hudclips/letters/mortgagee/2005ml. 22 See FHA Mortgagee Letter 00-38, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/ administration/hudclips/letters/mortgagee/2000ml. 23 FHA Mortgagee Letter 13-04, available at http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf. Borrowers whose FHA-insured mortgages have loan-to-value ratios of 90% or lower at origination will be able to stop paying the annual mortgage insurance premiums after 11 years. 24 U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial (continued...) Congressional Research Service 7 FHA-Insured Home Loans: An Overview Interest Rates The interest rate on FHA-insured loans is negotiated by the borrower, seller, and lender. The borrower has the option of selecting a loan with an interest rate that is fixed for the life of the loan or one on which the rate may be adjusted annually. Defaults and Loss Mitigation A mortgage is considered delinquent any time a payment is due and not paid. Once the borrower is 30 days late in making a payment, the mortgage is considered to be in default. In general, mortgage servicers may initiate foreclosure on an FHA-insured loan when three monthly installments are due and unpaid, and they must initiate foreclosure when six monthly installments are due and unpaid, except when prohibited by law.25 A program of loss mitigation strategies was authorized by Congress in 1996 to minimize the number of FHA loans entering foreclosure,26 and has since been revised and expanded to include additional loss mitigation options. The loss mitigation strategies that servicers are instructed to pursue on FHA-insured loans are summarized in Table 3.27 Additional loss mitigation options are available for certain populations of borrowers. By written agreement with the lender, a borrower in military service may suspend the principal portion of monthly payments and pay interest only for the period of military service, plus three months.28 On resumption of payment, loan payments are adjusted so that the loan will be paid in full according to the original amortization.29 In the past, FHA has also temporarily relaxed rules on the use of partial claims and loan modifications in specific areas in response to certain presidentiallydeclared major disasters, such as Hurricane Katrina.30 (...continued) Status of the Mutual Mortgage Insurance Fund, p. 54, http://portal.hud.gov/hudportal/documents/huddoc?id= FHAMMIF2012.pdf. FHA estimates that about 10% of the losses that FHA incurs on defaulted mortgages occur after the annual mortgage insurance premiums have been cancelled. 25 24 C.F.R. 203.355. State law may prohibit the start of foreclosure proceedings within the time frame specified by HUD. Also, military service of the borrower may delay foreclosure proceedings (24 C.F.R. 203.346). 26 The loss mitigation program replaced an assignment program; under the assignment program, servicers would assign a defaulted loan to FHA, which would pay the claim to the lender and then attempt to help the borrower avoid foreclosure directly. Under the loss mitigation program, servicers are given the responsibility of pursuing loss mitigation options before completing a foreclosure. P.L. 104-99, the Balanced Budget Downpayment Act, I, terminated the mortgage assignment program and authorized additional loss mitigation activities. 27 FHA Mortgagee Letters instruct FHA servicers on how to pursue loss mitigation strategies. For example, see Mortgagee Letter 2000-05, “Loss Mitigation Program – Comprehensive Clarification of Policy and Notice of Procedural Changes” and Mortgagee Letter 2012-22, “Revisions to FHA’s Loss Mitigation Home Retention Options.” Additional aspects of FHA’s loss mitigation program are addressed in other Mortgagee Letters. 28 In addition, as amended by HERA, the Servicemembers Civil Relief Act, P.L. 108-189, provides that individuals called into military service may apply to have any legal action against their homes stayed until nine months after the release from military service, and foreclosure can be prevented until one year after release from military service. 29 24 C.F.R. 203.345 and 203.346. 30 See, for example, Mortgagee Letter 2005-46, December 1, 2005, available at http://portal.hud.gov/hudportal/HUD? src=/program_offices/administration/hudclips/letters/mortgagee/2005ml. Congressional Research Service 8 FHA-Insured Home Loans: An Overview Table 3. Loss Mitigation Strategies Possible Remedies for FHA Loans in Default Special forbearance Lender/servicer works out a repayment plan that may include partial or suspended payments for a specified period of time. Loan modification The original mortgage is modified to include the total unpaid amount due. Changes may be made to the term, interest rate, or type of loan. Partial claim FHA provides an interest-free loan to the borrower to pay the arrearage. The borrower must repay FHA at the end of the original loan term or when the property is sold. FHA-HAMP The borrower’s monthly mortgage payments are reduced to 31% of monthly income using a combination of a loan modification and a partial claim. The partial claim can be used to provide a limited amount of principal forbearance, as well as to repay the arrearage. Pre-foreclosure sale Borrower sells the property and uses the proceeds to satisfy the mortgage debt. FHA pays a partial claim to the lender to make up the difference if the property is sold for less than the mortgage amount. Deed-in-lieu-offoreclosure Borrower deeds the property to FHA and is released from the mortgage. Sources: 24 C.F.R. 203, Subparts B and C; An Assessment of FHA’s Single-Family Mortgage Insurance Loss Mitigation Program Final Report (Abt Associates, 2000); HUD Mortgagee Letter 2009-23 Notes: FHA announced a restructuring of its home retention loss mitigation options in November 2012. This reorganization removed the partial claim as a standalone option, but allows FHA-HAMP to include a standalone loan modification, a standalone partial claim, or a loan modification and a partial claim used in combination. For more information, see FHA Mortgagee Letter 2012-22. Program Funding The FHA home mortgage insurance program is funded by the FHA Mutual Mortgage Insurance Fund (MMIF), which has been sufficient to fund the program without appropriations from Congress.31 Cash flows into the MMIF from insurance premiums, interest earnings, and proceeds from the sale of foreclosed homes. Cash flows out of the MMIF to cover administrative costs and claims on foreclosed mortgages. FHA maintains both a Financing Account and a Capital Reserve Account within the MMIF. The Financing Account includes enough funds to cover all expected future losses associated with the MMIF’s entire portfolio of outstanding loans, based on current assumptions. The Capital Reserve Account includes additional funds to cover unexpected losses. If there are changes in the expected costs associated with the MMIF’s portfolio of outstanding loans, then FHA moves funds between the Financing Account and the Capital Reserve Account as needed to ensure that there are sufficient funds in the Financing Account to cover projected expenses. If FHA ever needs to transfer more funds to the Financing Account than it has in the Capital Reserve Account, it can receive funds from Treasury to make this transfer without congressional action. If this were to occur, the funds that FHA received from Treasury would not be spent immediately, but would be held in the Financing Account and used to pay insurance claims only after the remaining funds in the Financing Account had been spent. 31 FHA does receive congressional appropriations for salaries and administrative contract expenses related to the MMIF. Congressional Research Service 9 FHA-Insured Home Loans: An Overview Section 205 of the National Housing Act32 requires HUD to ensure that the MMIF maintains a capital ratio of 2.0% at all times. The capital ratio measures the amount of funds that the MMI Fund currently has on hand, plus the amounts that FHA expects to earn (such as through premiums) or lose (such as through claims paid) on all of the mortgages that it currently insures. It expresses this amount as a percentage of the total dollar volume of mortgages that FHA currently insures. In other words, the capital ratio is a measure of how much FHA expects to have remaining after all future cash flows on the loans that it currently insures have been realized, assuming that FHA did not insure any more loans going forward. The capital ratio has been below this mandated 2% level since FY2009, and has most recently been found to be negative 1.44%.33 While a negative capital ratio does not mean that FHA is currently out of money, it does suggest that the funds that FHA currently has on hand, combined with the revenue it expects to earn on mortgages that it currently insures, will not be enough to pay for the losses it expects to incur in the future on the loans that it currently insures.34 The decline of the capital ratio does not in itself trigger any special assistance from Treasury, but it raises concerns that FHA is more likely to need such assistance in order to hold enough funds in the Financing Account to cover expected future losses.35 FHA has taken a number of steps designed to return the capital ratio to 2% or more, and it has indicated that it will continue to take more steps to strengthen the insurance fund.36 The steps that it has already undertaken include increasing the mortgage insurance premiums charged to borrowers; strengthening underwriting requirements, such as by instituting higher downpayment requirements for borrowers with the lowest credit scores; and increasing oversight of FHA-approved lenders. For more information on the financial status of the MMI Fund, and steps that FHA and Congress have taken to protect the insurance fund, see CRS Report R42875, The FHA Single-Family Mortgage Insurance Program: Financial Status and Related Current Issues, by Katie Jones. Program Activity In FY2012, FHA insured about 1.2 million new single-family purchase and refinance mortgages that together had an initial loan balance of $213 billion.37 At the end of FY2012, FHA was 32 12 U.S.C. §1711. U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial Status of the Mutual Mortgage Insurance Fund, page 35, http://portal.hud.gov/hudportal/documents/huddoc?id= FHAMMIF2012.pdf. 34 The calculation of the capital ratio does not take into account any mortgages that FHA may insure in the future. It is possible that mortgages insured in the future, combined with policy changes made by FHA or by Congress, could bring in enough additional revenue to pay for future losses on currently insured loans. 35 FHA has permanent and indefinite budget authority to pay for increased claim expenses, and could receive funds from Treasury without congressional action. If FHA ever needed assistance from Treasury, it would be determined through a re-estimate of expected claim expenses that is performed as part of the annual budget process. If FHA anticipates needing assistance from Treasury, the amount that it anticipates needing would be included in the President’s budget request. 36 For example, see the discussion of policy changes that FHA has made to date and changes that it plans to make in the future beginning on page 52 of HUD’s Fiscal Year 2012 Annual Report to Congress on the Financial Status of the FHA Mutual Mortgage Insurance Fund, November 16, 2012, p. 12, http://portal.hud.gov/hudportal/documents/huddoc? id=F12MMIFundRepCong111612.pdf. 37 U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial (continued...) 33 Congressional Research Service 10 FHA-Insured Home Loans: An Overview insuring a total of about 7.7 million single-family loans that together have an outstanding balance of $1.1 trillion.38 From 1934 through FY2012, FHA has insured a total of over 40 million home loans.39 Author Contact Information Katie Jones Analyst in Housing Policy kmjones@crs.loc.gov, 7-4162 Acknowledgments Bruce E. Foote, retired CRS Analyst in Housing Policy, was the original author of this report. (...continued) Status of the FHA Mutual Mortgage Insurance Fund, November 16, 2012, p. 12, http://portal.hud.gov/hudportal/ documents/huddoc?id=F12MMIFundRepCong111612.pdf. 38 U.S. Department of Housing and Urban Development, Monthly Report to the FHA Commissioner on FHA Business Activity, September 2012,” p. 6, http://portal.hud.gov/hudportal/documents/huddoc?id=12sep.pdf. These totals do not include Home Equity Conversion Mortgages (HECMs), which are reverse mortgages insured by FHA. 39 U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial Status of the FHA Mutual Mortgage Insurance Fund, November 16, 2012, p. 7, http://portal.hud.gov/hudportal/ documents/huddoc?id=F12MMIFundRepCong111612.pdf. Congressional Research Service 11Today, FHA is intended to facilitate access to affordable mortgages for some households who otherwise might not be well-served by the private market, such as those with smaller down payments. Furthermore, it facilitates access to mortgages during economic or mortgage market downturns by continuing to insure mortgages when the availability of mortgage credit has otherwise tightened. For this reason, it is said to play a “countercyclical” role in the mortgage market—that is, it tends to insure more mortgages when the mortgage market or overall economy is weak, and fewer mortgages when the economy is strong and other types of mortgages are more readily available. Current Role Facilitating Access to Mortgage Credit Some prospective homebuyers may have the income to sustain monthly mortgage payments but lack the funds to make a large down payment or otherwise have difficulty obtaining a mortgage. Borrowers with small down payments, weaker credit histories, or other characteristics that increase their credit risk might find it difficult to obtain a mortgage at an affordable interest rate, or at all. This has raised a policy concern that some borrowers with the income to repay a mortgage might be unable to obtain affordable mortgages. FHA mortgage insurance is intended to make lenders more willing to offer affordable mortgages to these borrowers by insuring the lender against the possibility of borrower default. FHA-insured loans have lower down payment requirements than most conventional mortgages. (Conventional mortgages are mortgages that are not insured by FHA or guaranteed by another government agency, such as VA or USDA.4) Because saving for a down payment is often the biggest barrier to homeownership for first-time homebuyers and lower- or moderate-income borrowers, the smaller down payment requirement for FHA-insured loans may allow these types 4 Conventional mortgages include mortgages that are purchased by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Although technically not government agencies, Fannie Mae and Freddie Mac are currently under government conservatorship and have received government financial assistance. Mortgages that meet Fannie Mae’s and Freddie Mac’s criteria are referred to as “conforming” mortgages. Congressional Research Service 2 FHA-Insured Home Loans: An Overview of households to obtain a mortgage earlier than they otherwise could. (Borrowers with down payments of less than 20% could also obtain non-FHA mortgages with private mortgage insurance. See the nearby text box on “FHA and Private Mortgage Insurance.”) FHA-insured mortgages also have less stringent requirements related to credit history than many conventional loans. This might make FHA-insured mortgages attractive to borrowers without credit histories or with weaker credit histories, who would either find it difficult to take out a mortgage absent FHA insurance or may find it more expensive to do so.5 FHA and Private Mortgage Insurance FHA-insured mortgages play a Another option for borrowers with small down payments might be to obtain mortgage insurance from a private particularly large role for first-time company, rather than from a government agency like FHA. This homebuyers, low- and moderate-income is known as private mortgage insurance (PMI). Conventional households, and minorities. For example, mortgages with down payments of less than 20% are generally in FY2014, 81% of FHA-insured required to carry PMI.6 Therefore, borrowers with a down payment of less than 20% may find themselves choosing mortgages made to purchase a home between a conventional mortgage with PMI or an FHA-insured (rather than to refinance an existing mortgage.7 mortgage) were obtained by first-time Whether PMI or FHA insurance is a more attractive option for homebuyers.9 Nearly one-third of these a specific borrower will depend on a number of factors, mortgages for first-time homebuyers including the borrower’s circumstances, the respective were made to minority households, and underwriting standards, and the fees charged by FHA and PMI FHA mortgages accounted for nearly half companies at a given point in time, which can be affected by of all home purchase mortgages made to economic conditions and the features of the mortgage itself.8 10 black and Hispanic households. 5 Historically, many FHA-insured mortgages have been made to borrowers with credit scores on the lower end of the spectrum. However, given the tightening of mortgage credit in response to the economic downturn in recent years, FHA has recently been insuring a greater share of mortgages to borrowers with higher credit scores. For example, in FY2006 about 25% of FHA-insured loans were made to borrowers with credit scores at 680 or above, and about 25% were made to borrowers with credit scores below 600. In FY2013, nearly 55% of FHA-insured mortgages were made to borrowers with credit scores at 680 or above, and less than 1% of loans were made to borrowers with credit scores below 600. See Integrated Financial Engineering, Inc., Actuarial Review of the Federal Housing Administration Mutual Mortgage Insurance Fund (Excluding HECMs) for Fiscal Year 2014, prepared for the Department of Housing and Urban Development, p. 44. 6 This is largely due to the requirements of Fannie Mae and Freddie Mac, which influence a large part of the mortgage market. By statute, Fannie Mae and Freddie Mac cannot purchase mortgages where the mortgage amount exceeds 80% of the value of the home unless the mortgage includes some kind of credit enhancement, such as private mortgage insurance. In December 2014, Fannie Mae and Freddie Mac announced that they would begin to accept certain mortgages with down payments as low as 3% with private mortgage insurance (previously, they had typically required a down payment of at least 5%). 7 Borrowers with less than a 20% down payment have options other than mortgage insurance. For example, during the mid-2000s it became more common for borrowers to take out a “piggyback loan,” or a second mortgage to cover part (or all) of the purchase price that exceeded 80% of the value of the home. These types of loans became much less common as mortgage credit standards tightened in response to economic and housing market turmoil in the late 2000s. 8 There are some differences between the pricing of PMI and FHA insurance. For one thing, PMI companies tend to charge different prices based on certain risk features of the mortgage, whereas FHA charges most borrowers similar fees. Furthermore, PMI companies are more likely to raise prices or reduce the amount of their insurance business in regions experiencing economic downturns or in periods of national economic distress. FHA, on the other hand, does not usually increase or decrease prices in response to specific market conditions. 9 U.S. Department of Housing and Urban Development, Annual Report to Congress Fiscal Year 2014 Financial Status FHA Mutual Mortgage Insurance Fund, November 17, 2014, p. 18, http://portal.hud.gov/hudportal/documents/huddoc? id=FY2014FHAAnnRep11_17_14.pdf. 10 Ibid., p. 18-20. Congressional Research Service 3 FHA-Insured Home Loans: An Overview Since FHA-insured mortgages are often obtained by borrowers who cannot make large down payments or those with weaker credit histories, some have questioned whether FHA-insured mortgages are similar to subprime mortgages.11 FHA-insured mortgages and subprime mortgages may appeal to some of the same pool of borrowers, such as those with lower credit scores. However, FHA-insured mortgages are prohibited from carrying the full range of features that many subprime mortgages could carry. For example, FHA-insured loans must be fully documented, and they cannot include features such as negative amortization.12 (FHA mortgages can include adjustable interest rates.) Such features appear to have contributed to high default and foreclosure rates on subprime mortgages. Nevertheless, some have suggested that FHA-insured mortgages are too risky, and that they can harm borrowers by providing mortgages that often have a higher likelihood of default than other mortgages due to combinations of risk factors such as low down payments and lower credit scores.13 Countercyclical Role Traditionally, FHA plays a countercyclical role in the mortgage market, meaning that it tends to insure more mortgages when mortgage credit markets are tight and fewer mortgages when mortgage credit is more widely available. A major reason for this is that FHA continues to insure mortgages that meet its standards even during market downturns or in regions experiencing economic turmoil. When the economy is weak and lenders and private mortgage insurers tighten credit standards and reduce lending activity, FHA-insured mortgages may be the only mortgages available to some borrowers, or may have more favorable terms than mortgages that lenders are willing to make without FHA insurance. When the economy is strong and mortgage credit is more widely available, many borrowers may find it easier to qualify for affordable conventional mortgages. Features of FHA-Insured Mortgages This section briefly describes some of the major features of FHA-insured mortgages for purchasing or refinancing a single-family home.14 Single-family homes are defined as properties with one to four separate dwelling units.15 11 There is not a consensus definition of subprime mortgages, but they generally refer to mortgages made to borrowers with credit scores below certain thresholds. Many subprime mortgages contained non-traditional features, but not all subprime mortgages contained these features, and a mortgage does not have to have non-traditional features to be considered subprime. For more information on how FHA-insured mortgages compare to subprime mortgages, see archived CRS Report R40937, The Federal Housing Administration (FHA) and Risky Lending, by Darryl E. Getter. 12 With a negative amortization loan, borrowers have the option to pay less than the full amount of the interest due for a set period of time. The loan “negatively amortizes” as the remaining interest is added to the outstanding loan balance, so that the loan balance increases over the time rather than decreasing as it would with positive amortization. 13 For example, see Edward J. Pinto, How the FHA Hurts Working-Class Families and Communities, December 2012, http://www.aei.org/files/2013/01/07/-how-the-fha-hurts-workingclass-families-and-communities_133838366627.pdf. 14 Detailed information on FHA’s underwriting and eligibility requirements can be found in HUD Housing Handbook 4155.1, “Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans,” http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh/4155.1. HUD is in the process of consolidating its requirements into a new single-family housing handbook, the first sections of which become effective in June 2015. Sections of the forthcoming single-family handbook and their effective dates can be found on HUD’s website at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/handbook_4000-1. 15 For example, a duplex would be considered a single-family property under this definition. A borrower could obtain (continued...) Congressional Research Service 4 FHA-Insured Home Loans: An Overview Eligibility and Underwriting Guidelines FHA-insured loans are available to borrowers who intend to be owner-occupants and who can demonstrate the ability to repay the loans according to the terms of the contract. In general, individuals who have previously defaulted on a mortgage are not eligible for FHA-insured loans for at least three years.16 FHA-insured loans must be underwritten in accordance with accepted practices of prudent lending institutions and FHA requirements. The FHA credit analysis worksheet is used to examine the applicant’s personal and financial status, monthly shelter expenses, funds required for closing expenses, effective monthly income, and debts and obligations. As a general rule, the applicant’s prospective mortgage payment should not exceed 31% of gross effective monthly income. The applicant’s total obligations, including the proposed housing expenses, should not exceed 43% of gross effective monthly income. If these ratios are not met, the borrower may be able to present the presence of certain compensating factors, such as savings history and past credit management, in order to qualify for an FHA-insured loan.17 Since October 4, 2010, FHA has required a minimum credit score of 500, and has required higher down payments from borrowers with credit scores below 580 than from borrowers with credit scores above that threshold.18 See the “Down Payment” section for more information on down payment requirements for FHA-insured loans. Owner Occupancy Generally, for loans closed on or after December 15, 1989, borrowers must intend to occupy the property as a principal residence. Property that has been acquired by FHA as a result of default or foreclosure may be sold to owner-occupants or investors, and in some cases the purchasers of these homes may be able to obtain FHA-insured loans. Eligible Loan Purposes FHA-insured loans may be used to purchase one-family detached homes, townhomes, rowhouses, two- to four-family buildings, manufactured homes and lots, and condominiums in developments approved by FHA.19 FHA-insured loans may also be obtained to build a home; to repair, alter, or (...continued) an FHA-insured mortgage to purchase a duplex, live in one unit, and rent out the second unit. The borrower must intend to occupy one of the units as his or her primary residence. 16 Exceptions can be made if the foreclosure was due to certain extenuating circumstances, such as serious medical issues, if the borrower has re-established a good credit record since the foreclosure. 17 See Chapter 4, Section F of HUD Housing Handbook 4155.1 at http://portal.hud.gov/hudportal/documents/huddoc? id=4155-1_4_secF.pdf. 18 U.S. Department of Housing and Urban Development, Mortgagee Letter 2010-29, September 3, 2010, http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-29ml.pdf. 19 Particular requirements that apply to FHA insurance of manufactured housing, condominium, and co-op loans are described in FHA Mortgagee Letters, which are available at http://www.hud.gov/offices/adm/hudclips/letters/ mortgagee/. Congressional Research Service 5 FHA-Insured Home Loans: An Overview improve a home; to refinance an existing home loan; to simultaneously purchase and improve a home; or to install a solar heating and cooling system or other weatherization improvements. Loan Term FHA-insured mortgages may be obtained with loan terms of up to 30 years. Interest Rates The interest rate on an FHA-insured loan is negotiated between the borrower and lender. The borrower has the option of selecting a loan with an interest rate that is fixed for the life of the loan or one on which the rate may be adjusted annually. Down Payment FHA requires a lower down payment than most other types of mortgages. Under changes made by the Housing and Economic Recovery Act of 2008 (HERA, P.L. 110-289), borrowers are required to contribute at least 3.5% in cash or its equivalent to the cost of acquiring a property with an FHA-insured mortgage. (Prior law had required borrowers to contribute at least 3% in cash or its equivalent.) Amounts borrowed from a family member are considered as cash for this purpose. Prohibited sources of the required funds include the home seller, any entity that financially benefits from the transaction, and any third party that is directly or indirectly reimbursed by the seller or by anyone that would financially benefit from the transaction. HUD has interpreted the 3.5% cash contribution as a down payment requirement and has specified that contributions toward closing costs cannot be counted toward it.20 Since October 4, 2010, FHA has required a 10% down payment from borrowers with credit scores between 500 and 579, while borrowers with credit scores of 580 or above are still required to make a down payment of at least 3.5%. FHA no longer insures loans made to borrowers with credit scores below 500.21 Maximum Mortgage Amount There is no income limit for borrowers seeking FHA-insured loans. However, FHA-insured mortgages cannot exceed a maximum mortgage amount set by law.22 The maximum mortgage amounts allowed for FHA-insured loans vary by area, based on a percentage of area median home prices.23 Different limits are in effect for one-unit, two-unit, three-unit, and four-unit properties. 20 U.S. Department of Housing and Urban Development, Mortgagee Letter 2008-23, September 25, 2008, http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_19737.pdf. 21 U.S. Department of Housing and Urban Development, Mortgagee Letter 2010-29, September 3, 2010, http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-29ml.pdf. 22 The FHA maximum mortgage amounts are codified at 12 U.S.C. §1709(b)(2). The statute allows for special higher limits for Alaska, Hawaii, Guam, and the Virgin Islands. To look up the maximum mortgage amount for a specific area, see HUD’s website at https://entp.hud.gov/idapp/html/hicostlook.cfm. 23 FHA calculates area-by-area limits each year based on the prior year’s area median home price data, so the actual dollar amount of the limit in a given area can change from year to year. The maximum mortgage amounts are set on a (continued...) Congressional Research Service 6 FHA-Insured Home Loans: An Overview The limits are subject to a statutory floor and ceiling; that is, the maximum mortgage amount that FHA will insure in a given area cannot be lower than the floor, nor can it be higher than the ceiling. In 2008, Congress temporarily increased the maximum mortgage amounts in response to turmoil in the housing and mortgage markets, with the intention of allowing more households to qualify for FHA-insured mortgages during a period of tighter credit availability.24 New permanent maximum mortgage amounts were established by the Housing and Economic Recovery Act of 2008 (HERA, P.L. 110-289). These maximum mortgage amounts were lower than the temporarily increased amounts, but higher than the previous permanent limits. However, the higher temporary limits were extended for several years, until they expired at the end of calendar year 2013.25 As of January 1, 2014, the maximum mortgage amounts are set at the permanent HERA levels. For a one-unit home, HERA established the maximum mortgage amounts at 115% of area median home prices, with a floor of $271,050 and a ceiling of $625,500 in high-cost areas.26 These maximum mortgage amounts, and the maximum mortgage amounts for 2-4 unit homes, are shown in Table 1. (...continued) county basis, except that in metropolitan statistical areas (MSAs) the maximum mortgage amount for the entire MSA is based on the county within the MSA that has the highest median home prices. 24 In early 2008, Congress enacted the Economic Stimulus Act of 2008 (ESA, P.L. 110-185), which temporarily increased the maximum mortgage amounts to 125% of area median home prices, with a floor of $271,050 and a highcost area ceiling of $729,750. Immediately prior to the enactment of ESA, the limits had been set at 95% of area median house prices, with a floor of $200,160 and a ceiling of $362,790 for a one-unit home. See U.S. Department of Housing and Urban Development, Mortgagee Letter 2008-02, January 18, 2008, available at http://portal.hud.gov/ hudportal/HUD?src=/program_offices/administration/hudclips/letters/mortgagee/2008ml. 25 The American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) amended the maximum mortgage amounts for calendar year 2009, setting them at the higher of (1) the 2008 limits set by ESA, or (2) the original 2009 limits set by HERA. Under ARRA, the floor was $271,050, the high-cost area limit was $729,750, and the limit in all other areas was the higher of 125% of 2007 area median home prices (the ESA limit) or 115% of more current area median home prices (the HERA limit). The ARRA limits were extended several times until they expired at the end of 2013. FHA has been following a policy of not allowing the HERA limits to fall relative to the original HERA limits, so if current HERA limits (based on the most recent median home prices) are lower than earlier HERA limits (based on 2008 or later area median home prices) in a given area, FHA uses the earlier HERA limits for the purposes of calculating the maximum mortgage amount in that area. 26 The statutory ceilings and floors are set as a percentage of the conforming loan limit, which is the dollar limit on the size of mortgages that can be purchased by Fannie Mae and Freddie Mac. Congress can change the ceilings and floors either by (1) changing the percentages of the conforming loan limit that constitute the ceiling and the floor, or (2) changing the conforming loan limit itself. Currently, the floor is set at 65% of the conforming loan limit and the ceiling is set at 150% of the conforming loan limit. The conforming loan limit is currently $417,000, so the floor is $271,050 (65% of $417,000), and the ceiling is $625,500 (150% of $417,000). Congressional Research Service 7 FHA-Insured Home Loans: An Overview Table 1. FHA Maximum Mortgage Amounts Property Size Maximum Mortgage Amount Floora 1-unit $271,050 115% of area median home prices for a one-unit property $625,500 2-unit $347,000 115% of area median home prices for a two-unit property $800,775 3-unit $419,425 115% of area median home prices for a three-unit property $967,950 4-unit $521,250 115% of area median home prices for a four-unit property Maximum Mortgage Amount in Areas Between the Floor and the Ceiling Maximum Mortgage Amount Ceilingb $1,202,925 Source: FHA Mortgagee Letter 2014-25 Notes: Actual mortgage limits in specific areas can be found at https://entp.hud.gov/idapp/html/hicostlook.cfm. a. This is the maximum mortgage amount in areas where 115% of area median home prices is lower than 65% of the Freddie Mac limit. b. This is the maximum mortgage amount in areas where 115% of area median home prices is equal to or higher than 150% of the Freddie Mac limit. The National Housing Act provides that FHA may adjust the mortgage limits for loans in Alaska, Hawaii, Guam, and the Virgin Islands to up to 150% of the ceiling. Mortgage Insurance Fees (Premiums) Borrowers of FHA-insured loans pay an up-front mortgage insurance premium (MIP) and annual mortgage insurance premiums in exchange for FHA insurance. These premiums are set as a percentage of the loan amount. The maximum amounts that FHA is allowed to charge for the annual and the upfront premiums are set in statute. However, since these are maximum amounts, HUD has the discretion to set the premiums at lower levels. Up-Front Mortgage Insurance Premiums HERA increased the maximum up-front mortgage insurance premium that FHA is permitted to charge. Currently, the maximum up-front premium that FHA may charge is 3% of the mortgage amount for a borrower who has not received homeownership counseling and 2.75% of the mortgage amount for a borrower who has received homeownership counseling. (Prior to HERA, these were set at 2.25% and 2%, respectively.) Currently, FHA is not charging different up-front premiums to borrowers who do and do not receive homeownership counseling. Since April 9, 2012, HUD has set the up-front premium at 1.75% of the loan amount, whether or not the borrower received homeownership counseling.27 This premium applies to most singlefamily mortgages.28 27 U.S. Department of Housing and Urban Development, Mortgagee Letter 12-4, “Single Family Mortgage Insurance: Annual and Up-Front Mortgage Insurance Premiums – Changes,” March 6, 2012, http://portal.hud.gov/hudportal/ documents/huddoc?id=12-04ml.pdf. 28 The premium changes do not apply to certain FHA programs, including Title I loans and Home Equity Conversion Mortgages (HECMs). Furthermore, as of June 11, 2012, FHA decreased the up-front mortgage insurance premium to 0.01% of the loan amount for streamline refinance transactions where the original loan was endorsed on or before May 31, 2009. Congressional Research Service 8 FHA-Insured Home Loans: An Overview Annual Mortgage Insurance Premiums In August 2010, Congress enacted P.L. 111-229, which raised the maximum annual mortgage insurance premium that FHA can charge. The amount of the maximum annual premium varies based on the loan’s initial loan-to-value ratio. For most loans, (1) if the loan-to-value ratio is 95% or higher, the maximum annual premium is 1.55% of the loan balance, and (2) if the loan-to-value ratio is less than 95%, the maximum annual premium is 1.5% of the loan balance.29 FHA increased the actual annual premiums that it charges several times in recent years in order to bring more money into the FHA insurance fund and ensure that it has sufficient funds to pay for defaulted loans.30 However, in January 2015, FHA announced a decrease in the annual premium for most single-family loans. For FHA case numbers assigned on or after January 26, 2015, the annual premiums are 0.85% of the outstanding loan balance if the initial loan-to-value ratio is above 95% and 0.80% of the outstanding loan balance if the initial loan-to-value ratio is 95% or below.31 This is a decrease from 1.35% of the loan balance for mortgages where the loan-to-value ratio is above 95% and 1.30% of the loan balance for mortgages where the loan-to-value ratio is 95% or below, which is what FHA had been charging from April 1, 2013, until January 26, 2015.32 These premiums apply to most single-family mortgages.33 FHA charges lower annual premiums for mortgages with terms of 15 years or less. Table 2 shows the up-front and annual mortgage insurance premiums that are in effect as of January 26, 2015. 29 These annual mortgage insurance premiums apply for mortgages with loan terms that exceed 15 years. Mortgages with loan terms of 15 years or less are subject to lower annual mortgage insurance premiums. 30 Most of the changes to the mortgage insurance premiums in recent years have been made administratively by FHA, although the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78), enacted on December 23, 2011, required FHA to increase the annual mortgage insurance premium it charges by 10 basis points (one-tenth of one percentage point). A list of changes to the mortgage insurance premiums, and references to the FHA Mortgagee Letters that implemented the changes, is available on page 61 of the FY2014 Annual Report to Congress on the Financial Status of the MMI Fund, http://portal.hud.gov/hudportal/documents/huddoc?id=FY2014FHAAnnRep11_17_14.pdf. 31 U.S. Department of Housing and Urban Development, Mortgagee Letter 2015-01, “Reduction of Federal Housing Administration (FHA) Annual Mortgage Insurance Premium (MIP) Rates and Temporary Case Cancellation Authority,” January 9, 2015, http://portal.hud.gov/hudportal/documents/huddoc?id=15-01ml.pdf. FHA charges a higher annual mortgage insurance premium on loans originated with a principal balance that exceeds $625,500. ($625,500 is the maximum mortgage amount in high cost areas under HERA, but from June 11, 2012 until the expiration of the temporarily higher ESA limits on January 1, 2014 FHA could insure loans up to $729,750 in high-cost areas.) 32 U.S. Department of Housing and Urban Development, Mortgagee Letter 13-04, “Revision of Federal Housing Administration (FHA) Policies Concerning Cancellation of the Annual Mortgage Insurance Premium (MIP) and Increase to the Annual MIP,” January 31, 2013, http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf. 33 These premium changes do not apply to certain FHA programs, including Title I loans and Home Equity Conversion Mortgages (HECMs). Furthermore, as of June 11, 2012, FHA decreased the annual mortgage insurance premium to 0.55% of the loan amount for streamline refinance transactions where the original loan was endorsed on or before May 31, 2009. Congressional Research Service 9 FHA-Insured Home Loans: An Overview Table 2. Annual and Up-Front Mortgage Insurance Premiums Beginning January 26, 2015 Annual Premium Up-Front Premium LTV <= 95% 0.80% 1.75% LTV > 95% 0.85% 1.75% Source: FHA Mortgagee Letters 12-04 and 15-01. Notes: These premiums apply to most FHA-insured single-family loans, with certain exceptions (such as certain streamline refinance transactions and FHA-insured reverse mortgages). Lower annual premiums are charged for mortgages with a loan term of 15 years or less. Premium Refunds and Cancellations In the past, if borrowers prepaid their loans, they may have been due refunds of part of the upfront insurance premium that was not “earned” by FHA. The refund amount depended on when the mortgage closed and declined as the loan matured. The Consolidated Appropriations Act 2005 (P.L. 108-447) amended the National Housing Act to provide that, for mortgages insured on or after December 8, 2004, borrowers are not eligible for refunds of up-front mortgage insurance premiums except when borrowers are refinancing existing FHA-insured loans with new FHAinsured loans. After three years, the entire up-front insurance premium paid by borrowers who refinance existing FHA-insured loans with new FHA-insured loans is considered “earned” by FHA, and these borrowers are not eligible for any refunds.34 The annual mortgage insurance premiums are not refundable. However, beginning with loans closed on or after January 1, 2001, FHA had followed a policy of automatically cancelling the annual mortgage insurance premium when, based on the initial amortization schedule, the loan balance reached 78% of the initial property value.35 However, for loans insured on or after June 3, 2013, FHA will continue to charge the annual mortgage insurance premium for the life of the loan for most mortgages.36 This change is in response to concerns about the financial status of the FHA insurance fund. FHA has stated that, since it continues to insure the entire remaining mortgage amount for the life of the loan, and since premiums were cancelled on the basis of the loan amortizing to a percentage of the initial property value rather than the current value of the home, FHA has had to pay insurance claims on defaulted mortgages where the borrowers were no longer paying annual mortgage insurance premiums.37 34 FHA Mortgagee Letter 05-03, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/ administration/hudclips/letters/mortgagee/2005ml. 35 See FHA Mortgagee Letter 00-38, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/ administration/hudclips/letters/mortgagee/2000ml. 36 FHA Mortgagee Letter 13-04, available at http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf. Borrowers whose FHA-insured mortgages have loan-to-value ratios of 90% or lower at origination will be able to stop paying the annual mortgage insurance premiums after 11 years. 37 U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial Status of the Mutual Mortgage Insurance Fund, p. 54, http://portal.hud.gov/hudportal/documents/huddoc?id= FHAMMIF2012.pdf. At the time, FHA estimated that about 10% of the losses that FHA incurred on defaulted mortgages occurred after the annual mortgage insurance premiums had been cancelled. Congressional Research Service 10 FHA-Insured Home Loans: An Overview Options for FHA-Insured Loans in Default An FHA-insured mortgage is considered delinquent any time a payment is due and not paid. Once the borrower is 30 days late in making a payment, the mortgage is considered to be in default. In general, mortgage servicers may initiate foreclosure on an FHA-insured loan when three monthly installments are due and unpaid, and they must initiate foreclosure when six monthly installments are due and unpaid, except when prohibited by law.38 A program of loss mitigation strategies was authorized by Congress in 1996 to minimize the number of FHA loans entering foreclosure,39 and has since been revised and expanded to include additional loss mitigation options. Prior to initiating foreclosure, servicers must attempt to make contact with borrowers and evaluate whether they qualify for any of these loss mitigation options; the options must be considered in a specific order. The loss mitigation options that servicers are instructed to pursue on FHA-insured loans are summarized in Table 3.40 Additional loss mitigation options are available for certain populations of borrowers. By written agreement with the lender, a borrower in military service may suspend the principal portion of monthly payments and pay only interest for the period of military service, plus three months.41 On resumption of payment, loan payments are adjusted so that the loan will be paid in full according to the original amortization.42 In the past, FHA has also temporarily relaxed rules on the use of partial claims and loan modifications in specific areas in response to certain presidentiallydeclared major disasters, such as Hurricane Katrina.43 Table 3. Loss Mitigation Options Possible Remedies for FHA Loans in Default Special forbearance Lender/servicer works out a repayment plan that may include partial or suspended payments for a specified period of time. Loan modification The original mortgage is modified to include the total unpaid amount due. Changes may be made to the term, interest rate, or type of loan. Partial claim The lender advances funds to bring a borrower’s loan current (up to 12 months’ worth of mortgage payments). FHA pays the lender a partial claim in the amount of the advance, and the borrower agrees to repay the amount of the advance to FHA at the end of the original loan 38 24 C.F.R. 203.355. State law may prohibit the start of foreclosure proceedings within the time frame specified by HUD. Also, military service of the borrower may delay foreclosure proceedings (24 C.F.R. 203.346). 39 The loss mitigation program replaced an assignment program; under the assignment program, servicers would assign a defaulted loan to FHA, which would pay the claim to the lender and then attempt to help the borrower avoid foreclosure directly. Under the loss mitigation program, servicers are given the responsibility of pursuing loss mitigation options before completing a foreclosure. P.L. 104-99, the Balanced Budget Downpayment Act, I, terminated the mortgage assignment program and authorized additional loss mitigation activities. 40 FHA Mortgagee Letters instruct FHA servicers on how to pursue loss mitigation strategies. For example, see Mortgagee Letter 2000-05, “Loss Mitigation Program – Comprehensive Clarification of Policy and Notice of Procedural Changes” and Mortgagee Letter 2012-22, “Revisions to FHA’s Loss Mitigation Home Retention Options.” Additional aspects of FHA’s loss mitigation program are addressed in other Mortgagee Letters. 41 In addition, as amended by HERA, the Servicemembers Civil Relief Act (P.L. 108-189) provides that individuals called into military service may apply to have any legal action against their homes stayed until nine months after the release from military service, and foreclosure can be prevented until one year after release from military service. 42 24 C.F.R. 203.345 and 203.346. 43 See, for example, Mortgagee Letter 2005-46, December 1, 2005, available at http://portal.hud.gov/hudportal/HUD? src=/program_offices/administration/hudclips/letters/mortgagee/2005ml. Congressional Research Service 11 FHA-Insured Home Loans: An Overview term or when the property is sold. FHA-HAMP The borrower’s monthly mortgage payments are reduced to 31% of monthly income using a combination of a loan modification and a partial claim. The partial claim can be used to provide a limited amount of principal forbearance, as well as to repay the arrearage. Pre-foreclosure sale Borrower sells the property and uses the proceeds to satisfy the mortgage debt. FHA pays a partial claim to the lender to make up the difference if the property is sold for less than the mortgage amount. Deed-in-lieu of foreclosure Borrower deeds the property to FHA and is released from the mortgage. Sources: 24 C.F.R. 203, Subparts B and C; An Assessment of FHA’s Single-Family Mortgage Insurance Loss Mitigation Program Final Report (Abt Associates, 2000); HUD Mortgagee Letter 2009-23. Notes: FHA announced a restructuring of its home retention loss mitigation options in November 2012. This reorganization removed the partial claim as a standalone option, but allows FHA-HAMP to include a standalone loan modification, a standalone partial claim, or a loan modification and a partial claim used in combination. For more information, see FHA Mortgagee Letter 2012-22. Program Funding The FHA single-family mortgage insurance program is funded through FHA’s Mutual Mortgage Insurance Fund (MMIF), which has historically been sufficient to fund the program without appropriations from Congress.44 Cash flows into the MMIF primarily from insurance premiums and proceeds from the sale of foreclosed homes. Cash flows out of the MMIF primarily to pay claims to lenders for mortgages that have defaulted. FHA maintains both a Financing Account and a Capital Reserve Account within the MMIF. The Financing Account includes enough funds to cover the expected future costs associated with the MMIF’s entire portfolio of outstanding loans, based on current assumptions. The Capital Reserve Account includes additional funds to cover unexpected increases in costs. If there are changes in the expected costs associated with the MMIF’s portfolio of outstanding loans, then FHA moves funds between the Financing Account and the Capital Reserve Account as needed to ensure that there are sufficient funds in the Financing Account to cover projected expenses. If FHA ever needs to transfer more funds to the Financing Account than it has in the Capital Reserve Account, it can receive funds from Treasury to make this transfer under existing authority and without any additional congressional action.45 This occurred for the first time at the end of FY2013, when FHA received $1.7 billion from Treasury to make a required transfer of funds between the accounts. The funds that FHA received from Treasury will not be spent immediately, but will be held in the Financing Account and used to pay insurance claims, if necessary, only after the 44 FHA does receive congressional appropriations for salaries and administrative contract expenses related to the MMIF. 45 FHA can receive funds from Treasury to cover higher-than-expected costs of insured mortgages under permanent and indefinite budget authority granted under the Federal Credit Reform Act of 1990 (FCRA), which governs how FHA and other federal credit programs are accounted for in the budget. The permanent and indefinite budget authority to cover increased costs of loans and loan guarantees is common to all federal credit programs governed by the FCRA and is not unique to FHA. The amount of funds that FHA will need to transfer between accounts in the MMI Fund is determined through a re-estimate of the expected costs of insured loans that is performed each year as part of the annual budget process. If FHA anticipates needing assistance from Treasury to make the transfer, the amount that it anticipates needing is included in the President’s budget request. Congressional Research Service 12 FHA-Insured Home Loans: An Overview remaining funds in the Financing Account are spent. The MMI Fund did not need any additional funds from Treasury during FY2014. Section 205 of the National Housing Act46 requires HUD to ensure that the MMIF maintains a capital ratio of 2.0% at all times. The capital ratio measures the amount of funds that the MMI Fund currently has on hand, plus the net present value of the future cash flows associated with the mortgages that FHA currently insures (e.g., the amounts it expects to earn through premiums and lose through claims paid). It then expresses this amount as a percentage of the total dollar volume of mortgages that FHA currently insures. In other words, the capital ratio is a measure of the amount of funds that would remain in the MMI Fund after all future cash flows on the loans that it currently insures have been realized, assuming that FHA did not insure any more loans going forward. The capital ratio has been estimated to be below this mandated 2% level since FY2009. It was most recently estimated to be 0.41% at the end of FY2014, an improvement from negative 0.11% at the end of FY2013 and negative 1.44% at the end of FY2012.47 A low capital ratio does not in itself trigger any special assistance from Treasury, but it raises concerns that FHA could need further assistance in order to continue to hold enough funds in the Financing Account to cover expected future losses. FHA has taken a number of steps designed to return the capital ratio to 2% or more, and it has indicated that it will continue to take more steps to strengthen the insurance fund.48 The steps that it has already undertaken include increasing the mortgage insurance premiums charged to borrowers; strengthening underwriting requirements, such as by instituting higher down payment requirements for borrowers with the lowest credit scores; and increasing oversight of FHA-approved lenders. For more information on the financial status of the MMI Fund, see CRS Report R42875, FHA Single-Family Mortgage Insurance: Financial Status of the Mutual Mortgage Insurance Fund (MMI Fund), by Katie Jones. For more information on policy changes that FHA has made, see CRS Report R43531, FHA Single-Family Mortgage Insurance: Recent Policy Changes and Proposed Legislation, by Katie Jones. 46 12 U.S.C. §1711. U.S. Department of Housing and Urban Development, Fiscal Year 2014 Annual Report to Congress on the Financial Status of the Mutual Mortgage Insurance Fund, page 34. The capital ratio calculation for the MMI Fund includes FHAinsured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs). While a negative capital ratio does not mean that FHA is currently out of money, it does suggest that the funds that FHA currently has on hand, combined with the revenue it expects to earn on mortgages that it currently insures, would not be enough to pay for the losses it expects to incur in the future on the loans that it currently insures. The calculation of the capital ratio does not take into account any mortgages that FHA may insure in the future. 48 For example, see the list of policy changes that FHA has made in recent years beginning on page 61 of HUD’s Fiscal Year 2014 Annual Report to Congress on the Financial Status of the FHA Mutual Mortgage Insurance Fund at http://portal.hud.gov/hudportal/documents/huddoc?id=FY2014FHAAnnRep11_17_14.pdf. 47 Congressional Research Service 13 FHA-Insured Home Loans: An Overview Program Activity Number of Mortgages Insured As shown in Table 4, FHA insured nearly 800,000 new single-family purchase and refinance mortgages in FY2014. Together, these mortgages had an initial loan balance of $135 billion. Of the 800,000 single-family mortgages that FHA insured in FY2014, nearly 600,000 (75%) were for home purchases, while nearly 200,000 (25%) were for refinancing an existing mortgage.49 The overall number of mortgages insured by FHA in FY2014 represented a decrease of 40% over FY2013, when FHA insured over 1.3 million mortgages. The number of mortgages insured by FHA increased beginning in FY2008, reaching a peak of 1.8 million mortgages in FY2009. FY2014 is the first year since FY2007 that FHA insured fewer than a million mortgages. Many FHA-insured mortgages are obtained by first-time homebuyers, lower-and moderateincome homebuyers, and minority homebuyers. Of the home purchase mortgages insured by FHA in FY2014, about 81% were made to first-time homebuyers.50 About 32% of mortgages insured by FHA in FY2014 were made to minority borrowers, and about 58% were made to low- or moderate-income borrowers.51 Furthermore, in 2013, FHA-insured loans accounted for about 46% of home purchase mortgages obtained by black households and 48% of home purchase mortgages obtained by Hispanic households.52 Table 4. Number of New Mortgages Insured by FHA in FY2014 Number of Mortgages Purchase Refinance Total 594,997 191,356 786,353 Source: FHA’s FY2014 Annual Report to Congress on the Financial Status of the MMI Fund, p. 66. Notes: These data do not include FHA-insured reverse mortgages. Numbers reflect FHA’s activity during FY2014. FHA activity can also be reported for a calendar year rather than a fiscal year; the market share data included in the Appendix reflect FHA activity during calendar years rather than fiscal years. As shown in Table 5, at the end of FY2014 FHA was insuring a total of about 7.8 million singlefamily loans that together have an outstanding balance of about $1.1 trillion.53 Since it was first established in 1934, FHA has insured a total of over 40 million home loans.54 49 U.S. Department of Housing and Urban Development, Fiscal Year 2014 Annual Report to Congress on the Financial Status of the FHA Mutual Mortgage Insurance Fund, November 17, 2014, p. 11. 50 Ibid., p. 18. 51 U.S. Department of Housing and Urban Development, FHA Annual Management Report Fiscal Year 2014, November 17, 2014, p. 14. The percentage of FHA-insured loans made to minority borrowers is based on all FHAinsured forward mortgages (both purchases and refinances) for the fiscal year; the percentage of FHA-insured loans made to low- and moderate-income borrowers is based on all FHA loans that were fully underwritten (that is, it excludes certain loans such as streamline refinances). 52 U.S. Department of Housing and Urban Development, Annual Report to Congress Fiscal Year 2014 Financial Status FHA Mutual Mortgage Insurance Fund, November 17, 2014, pp. 18-19. Figures are based on data reported under the Home Mortgage Disclosure Act (HMDA). 53 U.S. Department of Housing and Urban Development, FHA Production Report, September 2014, http://portal.hud.gov/hudportal/documents/huddoc?id=fhaproductionrptsep2014.pdf. These totals do not include Home Equity Conversion Mortgages (HECMs), which are reverse mortgages insured by FHA. 54 FHA Annual Management Report Fiscal Year 2014, p. 5. Congressional Research Service 14 FHA-Insured Home Loans: An Overview Table 5. Number and Dollar Volume of Outstanding FHA-Insured Mortgages in FY2014 Total Number of Mortgages 7,787,092 Dollar Volume of Mortgages ($ in millions) $1,083,510 Source: FHA Production Report, September 2014. Notes: Figures show the number and dollar volume of single-family insurance-in-force as of the end of FY2014, excluding Home Equity Conversion Mortgages. Market Share Measuring Market Share FHA’s share of the mortgage market is the amount of mortgages that are insured by FHA compared to the total amount of mortgages originated or outstanding in a given time period. FHA’s market share can be measured in a number of different ways. Therefore, when evaluating FHA’s market share, it is important to recognize which of several different figures is being reported. First, FHA’s share of the mortgage market can be computed as the number of FHA-insured mortgages divided by the total number of mortgages, or as the dollar volume of FHA-insured mortgages divided by the total dollar volume of mortgages. Furthermore, FHA’s market share is sometimes reported as a share of all mortgages, and sometimes only as a share of home purchase mortgages (as opposed to both mortgages made to purchase a home and mortgages made to refinance an existing mortgage). A market share figure can be reported as a share of all mortgages originated within a specific time period, such as a given year, or as a share of all mortgages outstanding at a point in time, regardless of when they were originated. Finally, FHA’s market share is sometimes also reported as a share of the total number of mortgages that have some kind of mortgage insurance (including mortgages with private mortgage insurance and mortgages insured by another government agency) rather than as a share of all mortgages regardless of whether or not they have mortgage insurance. FHA’s Share of the Mortgage Market Since 2001 In the early 2000s, FHA-insured mortgages generally made up between 10% and 15% of the home-purchase mortgage market, and between 5% and 10% of the overall mortgage market (both home purchase mortgages and refinance mortgages), as measured by number of mortgages. However, by 2005 FHA’s market share had fallen to less than 5% of home-purchase mortgages and about 3% of the overall mortgage market. Subsequently, as economic conditions worsened and mortgage credit tightened, FHA’s market share rose sharply, peaking at over 30% of homepurchase mortgages in 2009 and 2010, and over 20% of all mortgages (including both home purchases and refinances) in 2009. In 2013, FHA insured about 22% of new home purchase mortgages and about 14% of new mortgages overall. Congressional Research Service 15 FHA-Insured Home Loans: An Overview Figure 1 shows FHA’s market share as a percentage of the total number of new mortgages originated for each calendar year between 2001 and 2013. As described, FHA’s market share can be measured in a number of different ways. The figure shows FHA’s share of (1) all newly originated mortgages, (2) just newly originated purchase mortgages, and (3) just newly originated refinance mortgages. FHA’s share of home purchase mortgages tends to be the highest, largely because borrowers who refinance are more likely to have built up a greater amount of equity in their homes and, therefore, might be more likely to obtain conventional mortgages. For the number of mortgages insured by FHA in each year calendar since 2001, see the Appendix. Figure 1.FHA’s Share of the Mortgage Market, 2001-2013 Percentage of total number of mortgages originated in each year Source: HUD’s FHA Single-Family Mortgage Market Share Report, 2014 Q2, available at http://portal.hud.gov/ hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/fhamktsh/fhamktqtrly. The increase in FHA’s market share since 2007 is due to a variety of factors related to housing market turmoil and broader economic instability. One factor is that economic conditions led many banks to limit their lending activities, including lending for mortgages. Similarly, private mortgage insurance companies, facing steep losses from past mortgages, began tightening the underwriting criteria for mortgages that they would insure.55 Another factor is the increase in the maximum mortgage amounts that FHA can insure, enacted by Congress in 2008, which may have made FHA-insured mortgages a more viable option for some borrowers in certain areas. More recently, a number of factors may be contributing to a somewhat lower market share for FHA, including lower loan limits in some high-cost areas, higher mortgage insurance premiums, and greater availability of non-FHA-insured mortgages. Nonetheless, FHA’s market share remains high by historical standards. While not the focus of this report, FHA’s market share has been a subject of ongoing debate among policymakers. It is likely to continue to be a topic of debate, both in the context of policies specifically related to FHA as well as part of the broader debate about the future of the U.S. housing finance system. 55 For example, see Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort, and Glenn B. Canner, The 2009 HMDA Data: The Mortgage Market in a Time of Low Interest Rates and Economic Distress, http://www.federalreserve.gov/pubs/ bulletin/2010/articles/2009HMDA/default.htm. See also Radian’s 2010 annual report, at http://www.radian.biz/sfc/ servlet.shepherd/version/download/068C0000000SKI1IAO. Page 79 includes a discussion of Radian, a private mortgage insurer, tightening its underwriting standards. Congressional Research Service 16 FHA-Insured Home Loans: An Overview Appendix. FHA’s Market Share Since 2001 Table A-1 provides data on the number of mortgages insured by FHA in each calendar year since 2001, along with FHA’s overall market share in each fiscal year. Table A-1. FHA-Insured Mortgage Origination Activity CY2001-CY2013 Calendar Year FHA-Insured Home Purchase Mortgages FHA-Insured Refinance Mortgages Total FHAInsured Mortgages Total Mortgage Market FHA Share of Mortgage Originations 2001 870,000 407,000 1,277,000 11,627,000 11.0% 2002 764,000 412,000 1,176,000 16,922,000 7.0% 2003 630,000 653,000 1,283,000 24,887,000 5.2% 2004 467,000 248,000 716,000 14,319,000 5.0% 2005 323,000 133,000 456,000 14,485,000 3.1% 2006 295,000 116,000 411,000 12,330,000 3.3% 2007 317,000 211,000 528,000 10,294,000 5.1% 2008 845,000 561,000 1,406,000 7,092,000 19.8% 2009 1,088,000 897,000 1,985,000 9,391,000 21.1% 2010 944,000 519,000 1,463,000 8,359,000 17.5% 2011 760,000 322,000 1,082,000 7,626,000 14.2% 2012 738,000 559,000 1,297,000 9,484,000 13.7% 2013 664,000 507,000 1,171,000 8,155,000 14.4% Source: U.S. Department of Housing and Urban Development, FHA Single-Family Market Share 2014 Q2, http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/fhamktsh/fhamktqtrly. Notes: This table reflects FHA activity during calendar years. Data can also be reported for fiscal years; the FHA program activity data reported in Table 4 in this report reflect activity during fiscal years rather than calendar years. Congressional Research Service 17 FHA-Insured Home Loans: An Overview Author Contact Information Katie Jones Analyst in Housing Policy kmjones@crs.loc.gov, 7-4162 Acknowledgments Bruce E. Foote, retired CRS Analyst in Housing Policy, was the original author of an earlier version of this report. Congressional Research Service 18