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Tom Kelly
Tom Kelly
The Real Estate Adviser

January 19, 1996


The Real Estate Advisor

I called the local HUD office to try and ascertain if the recent shutdown of government operations had affected any consumer FHA home loans. The Department of Housing and Urban Development oversees all single-family mortgages insured by the Federal Housing Administration.

"I will be out of the office December 12, 13 and 14 . . . "

The voice mail message had not been updated, so chances were some loan files also had been put on hold.

When I finally reached Dave Rodgers, head of single-family housing, he said he had been the Lone Ranger in the office until early this week.

"I was told to protect life and property," Rodgers said. "I didn't think any lives could be involved while I was sitting here but something could certainly happen to some of our REO properties, like fire or repairs. That's the only thing I was supposed to focus on."

REO stands for real estate owned. All lenders have REOs due to default and foreclosure. While temporarily in title, the lender must care for the property and keep it on the market.

"Some of the contractors on those properties who had performed various jobs had not been paid," Rodgers said. "And, we could not sell any of our REOs to buyers because there was nobody around to process the deal.

"However, the average borrower of one of our loans was not really affected by the shutdown. We had to delay some lenders who were waiting the word that the loan would be insured, but that doesn't really affect the consumer."

Some lenders decided to stop taking FHA loan applications because of the uncertainty of FHA's future. They decided to only offer conventional products, thereby pulling the attractive low-downpayment options FHA loans carry from their offerings.

According to Wayne Locke at Chase Manhattan Mortgage, the most difficult task was attempting to get basic information.

"There was no staff to answer the phone regarding technical questions," Locke said. "You would try to find out what was happening and there was no one even available to provide that explanation."

Lenders were given "direct endorsement" authorization several years ago regarding the origination and processing of government loans. That meant the consumer did not have to have the initial blessing or forms provided only by FHA. However, the FHA's review process is the final hurdle for the lender and the shutdown kept that from occurring.

"Lenders could go ahead and process the loan," Rodgers said, "but we did not guarantee them that all loans would be insured until we had the time to review them. Under those conditions, some lenders did not want to proceed."

Things were not the same for loans guaranteed by the Department of Veterans Affairs. The VA dropped its adjustable-rate mortgage in November after a three-year trial period, but it had to drop some other important wrinkles because of the government shutdown.

"We still have a ballgame but the rules are really different," said Diane Holmly, residential lender in Interwest Savings Bank's Oak Harbor office.

In a capsule, the VA is back to where it was three years ago. Because of the impasse in the budget-cutting Capitol, Congress has yet to renew authorization for the programs it granted three years ago. Now, VA loans have a maximum interest rate of 7 percent and veterans may not pay any discount points.

Discount points can be viewed as prepaid interest. They were paid at a VA closing by the seller to increase the net yield on the loan. One discount "point" is equal to 1 percentage point of the loan. The term has now become synonymous with the loan origination fee. Points are prepaid interest and the loan origination fee is what the lender charges to do the paperwork and setup.

What was not deleted from the previous package was the inclusion of reservists. Men and women who have completed six years in the Army, Air Force, Marine Corps or Coast Guard Reserves, or the Army National Guard or Air National Guard, are eligible for no-down payment, VA home loans once given only to military personnel who served active duty.

This move opened the road to no-down-payment mortgages for approximately 600,000 more borrowers. Reservists have seven years from the time the law was enacted (Oct. 28, 1992) to apply for the loans.

It's important that consumers have options - and government loans have been workable, attractive options. Let's get this impasse resolved so that we don't take two steps backward.

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