Mortgage Insights Blog

I have recently been hearing from a lot of real estate agents about their buyer’s frustrations with the mortgage industry. It seems that most lenders today are taking forever to respond to new loan applicants, not too mention provide them with any speck of customer service, making it nearly impossible for buyers to make the competitive purchase offers required in our current real estate market. And when it comes time for the lender to come through on their loan pre-approvals, many are falling way short on their empty promises.

I hope to shed some light on some common mortgage pitfalls as well as provide some much needed guidance for anyone interested in starting the loan application process, especially if they are interested in applying for a mortgage in order to purchase a home.

The mortgage markets today are far more confusing then they ever have been for consumers, just four years ago banks were handing out loans to anyone with a heartbeat, but this is just not the case today. The same perfectly qualified buyer may receive loan approval from one particular bank but be turned down by another just because banks have their own overlying lending restrictions specific to their own interests.

These additional overlying credit restrictions can turn what seems to be a simple real estate purchase transaction into a nightmare for the buyers. Before they know it their bank of choice may not only be asking for all of their personal financial history over the past three years bust also for all property inspections on the home they are purchasing, and some even ask for all the recommended work brought up on the reports to be completed before they will fund the buyer’s new loan.

This may sound perfectly reasonable at first, but if the buyer is in the last legs of purchasing a short sale (which has probably taken three months to move forward) or worse yet a foreclosure (bank owned home/REO) then chances are that the sellers will not pay for the repairs, meaning the buyers would have to pay (could be thousands to tens of thousands) upfront for repairs to a home they do not own or face losing their chance to purchase the property, or worse yet, losing their earnest money deposit.

Many banks are also too busy to handle the business that they are receiving. On any given day the local branch of a larger retail bank may receive anywhere from 150 to 200 new loan applications. This creates a major problem when the branch employs less than 30 loan officers, not too mention the lack of loan processors and underwriters. Banks are still reeling from the mortgage collapse and just do not want to spend too much on building up their business around loans since they took such a hard fall over the past few years.

Then we have the Federal Government trying to do all they can to re-ignite the struggling economy by offering huge incentives for people to purchase and even refinance their mortgages. The Fed’s have now been artificially lowering interest rates on 30 year fixed mortgages, to the lowest in 40 years, for the past six months creating a huge demand for both refinances and purchase loans. But the banks know that the demand will be short lived, since the Fed’s can only afford to spend money for a short time-frame, and are reluctant to spend overhead increasing their loan operations thus leaving many loan applicants waiting as long as 100 days for their refinance and purchase loan applications to get approved.

So what can the savvy lon applicant do these days in order to protect themselves from a lender’s lack of service, but still hope to get an incredible interest rate?

It seems that the “time problem” many are experiencing is most likely due to working with the wrong banks. Although a particular bank has promised to help clients upfront, many end up wasting weeks of time and then end up telling the loan applicants that they cannot qualify due to recent changes in underwriting guidelines or something along those lines.

In my professional opinion, and the most important thing a loan applicant can do to protect themselves, is to first of all find a true mortgage professional to work with, not just a bank’s loan representative which is all you’ll find in retail. Rather I would recommend seeking the assistance of a mortgage broker as they tend to posses superior knowledge and a wider selection of mortgage programs.

For instance, I happen to work with over 25 different lenders (including Bank of America, Wells Fargo, Citibank, and much more) and have the ability not only to tell on any day which bank is offering the best rates but, most importantly these days, which bank is providing the most reliable service.

Just as some mortgage brokers have the ability to offer different mortgage programs from a wide range of major banks, loan applicants should also apply at more than one mortgage lender. If the applicants choose to work with larger banks this is especially important to remember.

And if any fears are brought up about credit being negatively impacted when applying through many different banks, this is not true. The credit bureaus allow mortgage applicants to shop at as many lenders as needed in a 90 to 120 day time period with all credit checks counting as a single inquiry against their credit.

Yes, I am a little biased because I am also a mortgage broker, but I also continue hearing about buyer’s horror stories while working with larger retail banks. And we have horror stories to tell from some of our own buyers who have chosen to work with some larger retail banks (I won’t name names but they are the largest bank in America) instead of working with a local mortgage broker. This doesn’t mean that all brokers are superior to retail banking operations (or vice versa) but some in particular are definitely better than others presently.

There are enough challenges in today’s real estate market that buyers must face; additional challenges in the mortgage market just complicate things even further.

The USCA "Best of Local Business" Award Program recognizes outstanding local businesses throughout the country. Each year, the USCA identifies companies that they believe have achieved exceptional marketing success in their local community and business category. These are local companies that enhance the positive image of small business through service to their customers and community.

Various sources of information were gathered and analyzed to choose the winners in each category. The 2009 USCA Award Program focused on quality, not quantity. Winners are determined based on the information gathered both internally by the USCA and data provided by third parties.

About U.S. Commerce Association (USCA)

U.S. Commerce Association (USCA) is a Washington D.C. based organization funded by local businesses operating in towns, large and small, across America. The purpose of USCA is to promote local business through public relations, marketing and advertising.

The USCA was established to recognize the best of local businesses in their community. Our organization works exclusively with local business owners, trade groups, professional associations, chambers of commerce and other business advertising and marketing groups. Our mission is to be an advocate for small and medium size businesses and business entrepreneurs across America.

SOURCE: U.S. Commerce Association

CONTACT:
U.S. Commerce Association
Email: PublicRelations@us-ca.org
URL: http://www.us-ca.org

Radian Group, Inc. a major insurer of private mortgage insurance for conventional financing announced today that they will temporarily no longer offer mortgage insurance for purchase money loans in CA. Until recently, Radian was among the last mortgage insurance provider offering higher loan-to-value ratios, above 90%, for qualified homebuyers.

It turns out that Radian was insuring too many loans in CA, NV, AZ and FL. And since they realized their heavily weighted market share of over 50% of their insured loan volume were in these states Radian made the decision to temporarily suspend any new mortgage insurance in these states. Radian gained their market share from their more aggressive guidelines over other mortgage insurance companies who limited their exposure by enforcing declining market policies that capped their maximum allowable loan-to-value ratios.

With Radian pulling out of the CA loan market only a few sources remain which limit loan-to-value ratios to a maximum 90%. This means that if buyers choose to purchase a home with a conforming loan amount, funded through Fannie Mae or Freddie Mac offering the lowest interest rates possible, they will now have to put 10% down.

With interest rates offered on mortgage programs already 1% higher this year, higher down payment requirements are coming at an already tumultuous time in the housing market. Although there are still plenty of incentives left to keep homes sales trucking along through the summer, this news will not benefit our market place as it is just on the verge of recovery.

The good news is that FHA insured financing is still being offered with as little as 3.5% down up to $729,750 loan amounts in high cost counties, and there are plans to allow first time homebuyers the ability to borrower their qualified Federal tax credits upfront to cover their closing costs in the form of a bridge loan made by the State of CA.

Well, we're officially well into the spring/summer selling season and things are really heating up in our local markets - but how long can you expect this trend to continue? That's the trillion dollar question!

Looking back at May we had great news for California as existing-home sales are up 80% over last year. Locally we saw the median home price for Santa Clara County increase 9% to $475,000 as sales in the higher end homes have finally started to kick in (click here for current Santa Clara County housing stats). I guess when a qualified buyer realizes they can get a million dollar home for around $800k they feel it's a deal they just can't pass up. But then again, how many higher-end buyers are still out there that have the ability to make 30% down payments, especially when money is hard to come by these days.

To sustain an increase sales volume in the higher-end housing markets, we need to see the jumbo loan market (loan amounts above $729k) open up with some more aggressive financing, i.e. allowing higher loan-to-value ratios and less down payment - then we can expect the higher-end market to really rebound as it has already stopped falling.

On the lower-end of the housing market, home sales are still being dominated by foreclosures and short sales, with bank owned homes making up the majority of sold homes. In fact, there is such a demand for bank owned foreclosures that you can almost always expect a bidding war to break out, especially in the Santa Teresa, Blossom Valley, Cambrian, and South San Jose areas of Santa Clara County.

But is this trend going to continue? And what about that large pool of foreclosures that is ready to flood the markets, how will that affect home prices?  Well, from an insider’s point of view demand has definitely been stimulated by the first time homebuyer tax incentives and historically low interest rates. First time homebuyers are now comprising approximately 40-45% of the housing market.

According to the National Association of Realtors (NAR), first time homebuyers represented over 455,000 home sales purchased nation wide this past first quarter and these are most likely only the first wave as housing affordability conditions are at record high levels. NAR expects for the trend to continue and even realize a measurable increase in home sales during the second half of the year leading to further price stabilization in most areas (especially in Santa Clara County as we have already been experiences a stabilization).  

It may seem that the government's plan to increase home sales is really starting to become noticeable and even NAR’s own forecast is calling for a continued increase in home sales nationwide, but whether or not our local housing push can last through the summer has become questionable. Recent economic developments have lead to increases in mortgage interest rates and there are still a large number of buyers sitting on the fence unsure of whether or not it is a good time to buy.

It seems that the rest of the world has started to question the Fed's bail-out plan of issuing an unthinkable amount of new government debt...I guess overseas investors don't like the idea of financing old debts with new debts, and this has lead to a massive sell off of US treasuries further resulting in increased mortgage rates.

And if mortgage interest rates continue their current climb (last week we saw rates reported by Freddie Mac’s Mortgage Market Survey at a 7 month high) we could notice a negative impact on home sales. We have already seen a decline in overall loan application volume due to the higher rates, and housing affordability is sure to suffer along with it, but according to NAR higher interest rates are not a major determining factor when it comes to home purchases.

Beyond interest rates, mortgage programs as a whole are harder to qualify for, most requiring larger down payments of at least 10%. And if the lender calls for mortgage insurance there are additional underwriting overlays that can disqualify a majority of loan applicants – such as higher credit scores, lower debt-to-income ratios, and higher reserve requirements.

Overall, the current lending environment is not really conducive of a housing recovery other than the low interest rates that WERE present over the past few months. But, if these programs start to loosen as expected heading into the second half of the year, I believe that we will surely see another noticeable wave of homebuyers flood the market.

So what’s with that huge pool of foreclosure properties that the banks are holding onto? (Well, I had to keep the best for last – I wouldn’t want you to miss everything we have already covered).

It seems that the word on the street these days is that buyers should wait for the next wave of foreclosures to hit the market before they spin their wheels getting caught in bidding wars on the current inventory of REO’s.  Well, it may be true that there are bidding wars breaking out over these bank owned foreclosures, but don’t expect to see a massive volume of homes hit the market anytime soon. And the best deals may not be those often overpriced bank owned foreclosures, we are seeing the best deals being purchased by those few brave buyers willing to patiently wait for a short sale to close.

Some important points to consider for anyone watching the housing market - even if banks had a large inventory of foreclosed homes they wouldn’t unleash them on the market all the same time, it seems that they have learned a thing or two from 2007 and 2008, if they control the inventory they can artificially control the demand for housing. Plus, it just takes banks a lot longer to put these foreclosures back on the market once they are repossessed. Prior to 2007 banks could relist a foreclosure in as little as a month, now it can take as long as 6 months – banks are just so busy with staying on top of new business (refinance and purchase loan applications), corporate consolidations and re-organizations (Bank of America and Countrywide, Wells Fargo and Wachovia, Chase Bank and Washington Mutual), and just keeping on top of all of Fannie Mae and Freddie Mac’s mortgage guideline changes – surely marketing foreclosures is important but just how fast can you squeeze a watermelon through a garden hose?

Other factors contributing to the hold up is a longer foreclosure process brought about by state legislatures in an attempt to force banks to try every possible solution of keeping homeowner’s in their homes before they can be foreclosed. Additionally, state legislatures have extended mandatory moratoriums stopping active foreclosures and extending the required notice times before banks can repossess these homes. Furthermore, many lenders including Fannie Mae and Freddie Mac have begun a renter’s program aimed at keeping the foreclosed homeowner in their property as a renter with the ability to repurchase the home at a later date.

Not to mention that the short sale and loan modification processes has become more efficient. Lead by government policy, Making Home Affordable and Hope Now Alliance, lenders have the resources and the procedures in place to maximize their home retention efforts for those homeowners falling into default and for those homeowners unable to keep their homes, the ability to turn short sales around much faster. The banks have realized that they would rather avoid the high cost of foreclosing on a property than pay for the necessary repairs that many distressed properties require before they are even in a condition that can be marketed for sale, and once repaired then require additional maintenance costs. To read an article written this past January discussing such a pool of foreclosure properties please follow the link – Flood of Foreclosures: It’s worse than you think.

Final Thoughts: In my opinion, those buyers who are waiting for the best deal will be those that missed out on the lowest prices available in Silicon Valley real estate over the past decade. Remember, when purchasing a home for a primary residence one should not look at the purchase as an investment, rather one should focus on long-term appreciation, tax shelter incentives, advantages of owning over renting, and overall pride of homeownership.

Due to the current financial crisis, credit card carriers to mortgage providers are upping their credit standards and making it harder for consumers to qualify for an extension of credit.  It only seems timely that I spend this blog on reminding everyone the importance of actively managing your credit. 

First of all, active credit management does not mean the process of transferring credit card balances from credit card to another in order to get lower rates or even rewards points – that is debt management which is another important topic - rather if you are working on maintaining a higher credit score for an upcoming home purchase, or other purchase that requires high credit scores, then please pay attention:

How is your credit scores calculated? A consumer credit score is made up of five key components:

1. Payment History - 35% Types of accounts (credit card, mortgage, etc.), accounts paid as agreed, number of past due accounts, etc.

Be sure that you make all your payments in a timely manner. This is incredibly important in applying for new credit these days. If you have trouble remembering to pay some credit card bills or student loans on time, then be sure to take advantage of an automatic debit that can authorize your bank to make pre-determined monthly payments.

Be careful with auto debits though, if you happen to spend more on your credit card be sure to double check the monthly amount being transferred monthly is enough to cover the minimum payments. And sometimes, if your bank account does not have a large enough balance to cover the payment the auto payment will not be made.

And if a payment is missed, some creditors may allow a one-time exception and may delete a derogatory report from your credit history, but many do not. When you have a late payment the only thing that can heal your credit score is time – the more time that elapses form the missed payment date the less impact it will have on your score as you continue to maintain timely payments on all other debts.

2. Amounts Owed - 30% Balances of current loans, debt-to-credit ratio, proportion of installments still owed, etc.

Balances are another area where consumers can get into trouble. Many credit card holders may receive offers to transfer high balances over to another card fixed at a low interest rate – while it may make financial sense to save some interest it will actually have an adverse affect on your credit scores.

Using Balance Transfers Wisely - So if you are trying to maintain or increase your credit scores do not be tempted to transfer balances to a lower interest credit card because if you max out the credit line it will adversely affect your scores. And if you have to open a new account in order to transfer the balance, you will be hurt further by a credit inquiry and new account. But, if you already have a credit line maxed out, then transferring part of the balance to another card will help your scores. A general rule of thumb is to try to keep your credit card balances under 50% of the maximum credit limit available on the credit line.

3. Length of Credit History - 15% Time since accounts opened, last activity, etc.

This is another area of confusion; length of accounts is on of the most crucial yet often overlooked part of your credit score. The credit reporting bureaus want to see consumers establish long standing credit lines to prove that they can properly maintain credit. The bureaus give consumer tradlines with at least 5 years of seasoning (length of time you have had an active tradeline for) the highest points.

But if you do not use it then you loose it!  It is important to remember to charge these older credit lines at least once every few months in order to keep them active, since inactive accounts will not give you any positive points (or take any way either) and they also will not continue to season.

Think twice before closing your credit lines!!  Do not payoff old credit cards with new cards if you have the intention of closing the old credit account – once the account has been closed, you just lost that many years of credit history – which is not easy to rebuild.

4. New Credit - 10% Recent inquiries, new accounts, etc.

Be careful when opening any New Accounts before your purchase! New accounts need time to properly season – the bureaus need to make sure that you can manage any new accounts (increases to your credit liability) and will generally not provide positive points to newer accounts until they have at least 12 months of payments history reported to the bureaus. 

Credit Inquiries - When new accounts are opened the creditors will check your credit, which is called a credit inquiry. Many times credit inquiries will drop your score 10-15 pts for each new inquiry over a 3 month period. Consumer inquires affect your credit the most – these are credit checks for credit cards and other revolving debts (debts in which the credit balance can fluctuate based on your spending). Mortgage inquiries generally impact your score the least as the bureaus understand that consumers need to be able to shop for such a large purchase.

Be Wary of Department Store Credit Cards - Be mindful of this when you are constantly being offered new credit card accounts through department stores in order to save 10-15% off your purchases. Also, department store credit cards usually carry the highest interest rate terms – stick to your established credit cards, most major credit card carriers offer rewards programs that will go a lot further then saving a mere 10-15% off your purchase.

5. Types of Credit Used - 10% Mortgages, credit, retail, etc.

The credit bureaus want to see that savvy consumers are rewarded versus frivolous spenders. In other words, the bureaus are looking for a good mix of trade lines on your credit report i.e., more major credit cards than small department store cards, keep institutional loans (auto loans, student loans, etc.) for the full term of the loan, and do not co-sign for friends or relatives.

The larger the credit line, such as a mortgage or car loan, the more points you will eventually gain as you slowly pay off the loan over 5 or more years.

Please see my website for further details on how you can increase your credit scores - http://www.eaglefinancialgrp.com/ImproveYourCreditScore

Well, it was only a matter of time before the Feds attempts to keep interest rates low would backfire on them. Spurred by a sharp sell off in the long term US Treasuries market, interest rates rose over a full 1% this week but ended their rise just over 5%.  

Mortgage rates closely mirror long-term bond yields. Since home mortgages are long-term debts, it makes sense that they would follow closely to the movements of long-term debt security instruments such as the 10 year US Treasury bond.  Remember, the interest being paid on the mortgage by the borrower is an expected return that the investor (lender) is seeking in exchange for lending the borrower the principal loan amount.  If the investor (lender) thinks that there is an increased risk for future inflation (increased inflation devalues long term investments) then the investor will require an increased expected return to counteract the effects of the inflation risk – this causes mortgage rates to increase.

This week we saw the market get caught in the dilemma of the current economic recession which the government has tried to end by spending.  But that same government spending requires taking on more government debt, i.e. continued issuing of additional US Treasury Bonds, which now requires higher yields (expected returns) to attract new buyers. During mid-day Wednesday, bond yields broke out to higher levels, meaning bond prices started crashing, concerning equity traders to the point they started selling even further increasing bond yields.

Overall, the yields on bonds, and therefore mortgages, have come back down to Earth today, but this may mark the beginning of the end for the 4% 30 year fixed rate mortgage. Of course, considering where interest rates have been in the past – flashback to 1981 when we saw them reach 18% - if a homeowner is able to lock-in a mortgage rate in the 5% range they should consider themselves very lucky.

That’s the issue – Lenders want the housing market to recover before they open up up the lending markets. Mortgage guidelines will not loosen until the housing market and the overall economy shows signs that we are well into a recovery. And the housing market will likely not see a strong recovery until homeowners can avoid foreclosure, by refinancing out of risky high interest loans, and buyers can start purchasing with more aggressive financing terms.

So what comes first – the chicken or the egg?

This is the current dilemma we’re facing but there are some positive measures being taken, for instance the government is trying to intervene by providing historically low interest rates. The Fed has been spending billions of dollars buying up the secondary mortgage market and providing tax credits to first time homebuyers to spur purchases. And in an attempt to keep current homeowners in their homes they are offering loan modification programs and refinance programs for people that can prove their income and prove they can afford their housing payments under modified terms - see Making Home Affordable program.

What we are witnessing in our local market area, throughout Silicon Valley, is that most homeowners who purchased between 2004 and 2006 have larger loan amounts than allowed through the government's current housing affordability programs, and the lenders and investors whom own these mortgage notes do not have any financial incentives to work with these high loan amount borrowers other than to avoid repossessing their homes through a costly and very lengthy (thanks to CA politicians) foreclosure process.

But until these lenders and investors realize how to communicate internally in order to quickly help homeowners with a modification or short sale in lieu of foreclosing on them, we probably will continue to see the higher-end local housing market suffer. Just to demonstrate the lack of communictaion taking place in the jumbo mortgage market, loan servicers are reluctant to offer defaulting homeowners payment plans or modifications to their mortgages without the underlying mortgage-note holder's (investor) permission as they do not want to be sued by the investors. Adding to the confusion is that these underlying investors can be anything from a small community bank or credit union on the east coast, to international investors, or even small groups of money market funds - making communication a seemingly impossible feat.

And while banks are still foreclosing on these larger, more aggressive loans, they will not start providing funds for new loans until things have stabilized. The government’s financing intervention can only provide mortgages up to $729k in our area leaving the higher end homes – like those in Willow Glen area – out of reach for the majority of high-end buyers. Any homes selling for above $800k will require true “jumbo” financing and requires a large down payment (up to 30%) which most buyers are just afraid of making in the current downward housing market. And jumbo loans have even more stringent guidelines than their conforming loan counterparts.

The good news is that the bottom of the housing market in our immediate area is starting to rebound nicely as first time homebuyers and investors are gobbling up inventory. First time homebuyers are finding that affordability has returned to the housing market, especially when they can own a home for just about as much as it would cost to rent these days, taking into consideration their mortgage interest deduction of course. And investors are now able to purchase homes, with 20% down, and immediately realize positive cash flows from their investments.

We are especially experiencing this in areas such as Santa Teresa, Blossom Valley, Cambrian and Campbell. The median home prices in these areas has fallen enough to allow first time homebuyers higher affordability which is causing bidding wars to break out on many bank owned foreclosure sales.

Hopefully the demand for housing in theses areas continues to eat up any additional supply which will eventually bring price stability to the higher end homes.

Under the new Making Home Affordable refinance program, the Obama Administration is hoping that more homeowners can take advantage of the historic low interest rates offered on 30 year fixed rate mortgages while the Fed is still actively buying the market.  They are targeting homeowners that are current on their mortgage payments but may not be able to take advantage of the historically low interest rates now offered due to a decrease in their home's value. Homeowners must still meet income and credit qualifications but can now refinance their first mortgage as long as it meets the following criteria: 

• First - the current loan must be owned by Fannie Mae or Freddie Mac. Remember, even though your loan is currently being serviced (the act of collecting your monthly mortgage payments) by a bank - Wells Fargo, Countrywide, American home Mortgage, etc. – lenders will sell your loan in the secondary market to replenish their reserves in order to continue originating new mortgages. The majority of these loans end up being purchased by Fannie Mae and Freddie Mac, or by Wall Street investors, and if your loan was purchased by Fannie or Freddie your loan will qualify for the new program. To determine if your loan is owned by Fannie Mae or Freddie Mac please go to their respective web sites and fill out the on-line inquiry forms – Fannie Mae: http://loanlookup.fanniemae.com/loanlookup/ and Freddie Mac - https://ww3.freddiemac.com/corporate/

  Second – the new program will allow you to borrow up to 105% of your home’s current value without requiring any mortgage insurance, and if you already have mortgage insurance it will transfer to the new loan without any increases to your premium. To get an approximation of your home’s value try www.zillow.com or www.cyberhomes.com

  Third – Credit requirements still remain strict – borrowers must be able to prove income and assets under a full documentation mortgage application, meaning borrowers must be able to provide tax returns and pay stubs to prove their incomes as well as have sufficient credit scores (680+ with no 60 day late’s in the past 12 months).

  Fourth - This program will only be eligible for first loans that fall within Fannie Mae and Freddie Mac loan amount guidelines (loan amounts up to $729,750 for Santa Clara County). For a loan amount look up in your county go to:

  Fifth – If you have a 2^nd mortgage then the 2^nd lender must be willing to re-subordinate to the new mortgage - You may have a 2^nd mortgage that will not be counted in the calculation when determining your new loan to value (up to 105% allowed) and that 2^nd mortgage must agree to re-subordinate behind a new first mortgage. Most 2^nd lenders are cooperating, especially those who have received Federal bail-out money (Wells Fargo, Chase, WAMU, CitiBank, Suntrust, etc.) but others are not and there is no way to pressure them into agreeing.

  Sixth – Will the new refinance improve your current housing payment situation? You will not be able to consolidate your first and second mortgages or any other debts – only first mortgages are eligible for the program without providing any cash-out, however, the government is working on a similar program for 2^nd mortgages. Expected Interest rates offered through the program - current interest rates offered for a new 30 year fixed rate mortgage through this program are between 4% and 5% for loan amounts of $417,000 and below and between 5% and 6% for loan amount above $417,000 to $729,750

If you are interested in discussing the above criteria or about finding a possible solution to your current financing please feel free to contact me and we can schedule an appointment to review your financial information. For additional resources please feel free to view the government's website - http://makinghomeaffordable.gov/

The importance of FHA in the home mortgage market has changed markedly over the years. This has been due less to changes in the FHA itself than to changes in the broader market in which it operates.

In the early 1990s, FHA had about 15 percent of the home-purchase market. In subsequent years through 2006, FHA lost business to the growing subprime market, which took many borrowers who could have gone FHA. In addition, FHA lost business to the prime conventional market, which developed and aggressively merchandised option adjustable-rate mortgages (ARMs) and interest-only products, as well as reduced documentation underwriting, none of which FHA offered. In 2006, FHA's share of the purchase market had fallen to less than 4 percent.

Then came the financial crisis.

With home prices declining and defaults rising, the subprime market largely disappeared; option ARMs declined to a trickle; and documentation requirements on prime conventional loans were substantially tightened. In addition, FHA loan limits were raised materially in 2008, and again in 2009. In early 2009, FHA's market share of new purchases was back to about 15 percent, and its share of refinances was substantially higher.

The FHA market niche: An FHA borrower in early 2009 1) doesn't need a loan larger than the FHA maximum in the borrower's county; 2) can't put more than 3.5 percent down, which is the FHA requirement; 3) is not eligible for a VA loan, which allows zero down; and 4) can't be approved for a conventional loan but can be approved under FHA's more liberal underwriting rules.

A borrower who can put 10 percent down on a loan smaller than the FHA maximum, and who can be approved for a conventional loan, will usually do better with a conventional loan, but there can be exceptions - see below.

FHA loan limits: The loan limits on FHAs effective until year-end 2009, established on a county basis, were the same as those applicable to Freddie Mac and Fannie Mae. On a single-family house, they ranged from $271,050 to $729,750 in 76 higher-price counties. Loan limits on two- to four-family houses are higher. On HECMs (reverse mortgages), the maximum was raised to $625,500 for the balance of 2009. You can find the limit applicable to any particular county at www.hud.gov.

Down-payment requirements: In 2009, FHA's 3.5 percent down payment compared with 5 percent to 10 percent on most conventional loan programs. Zero-down loans, which were widely available in the conventional sector during the go-go years of 2000-2006, have largely disappeared. The only generally available zero-down loans are VAs and USDA loans in rural counties.

FHA borrowers in some cities, counties or states have access to special programs that eliminate the need for a down payment by offering second mortgages at favorable terms. Usually, no payments are required on the second until the house is sold. The public agencies offering these programs have their own eligibility rules that are independent of FHA.

Underwriting requirements: FHA will accept lower credit scores than are acceptable on prime conventional loans, and are more forgiving of past mistakes. FHA will forgive a bankruptcy after only two years, and a foreclosure after three years.

Mortgage insurance: FHA borrowers pay a monthly mortgage insurance premium of 0.5 percent per year (0.55 percent on loans with less than 5 percent down), and an upfront premium of 1.75 percent, which is almost always included in the loan amount. In contrast, most conventional loans have only a monthly premium, which is higher than the FHA monthly premium but disappears at 20 percent down. Because of the higher mortgage insurance premiums, an FHA will be more costly to a borrower when the rate and points are the same.

Differences in rate and points between FHAs and conventionals: In shopping lenders who offer both FHA and conventional loans, I have found that in many cases the rate and points quoted on FHAs are higher. Lenders often charge larger markups on FHAs, partly because they are more costly to originate, and also because "they can." There isn't as much competition for FHAs because a large proportion of brokers and smaller lenders don't offer them.

On the other hand, I found that some lenders quote the same or even lower rates and points on FHAs. This kind of market fragmentation, which surprised me, appears to be a consequence of the financial crisis. It places an added burden on borrowers shopping for the best deal, as if that wasn't already difficult enough.

Comparing prices: Borrowers should be able to compare the all-in costs of an FHA and a conventional by comparing their APRs. The APR takes account of the rate, points, other lender fees and all mortgage insurance premiums. Unfortunately, the APR assumes that all loans run to term, which makes it deceptive for any borrower who expects to have the loan less than 10 years.

The government is cracking down on scammers who take advantage of desperate homeowners facing foreclosure.

Federal and state officials are trying to put an end to fraudulent companies that charge borrowers up-front fees of $1,000 to $3,000 to modify their loans. For the most part, the modifications never happen.

"These are predatory schemes designed to rob Americans of their savings and potentially their homes," says Treasury Secretary Timothy Geithner. "We will shut down fraudulent companies more quickly than before. We will target companies that otherwise would have gone unnoticed under the radar."

The Federal Trade Commission says 71 companies ran suspicious advertisements and complaints should filed at the Federal Loan Modification Law Center and Bailout.hud-gov.us, both based in California, and Clearwater, Fla.-based Home Assure LLC.

Not every loan modification business is a fraud, but "swimming around in those waters are a lot of sharks," says Jim Carr, chief operating officer at the National Community Reinvestment Coalition.

> Loan Modifications - Learn more about your loan modification alternatives

> Making Home Affordable - Get the latest information on the government's newest modification program