The article below concerns a recent announcement from HUD that could fundamentally change qualifying guidelines for FHA mortgages, the most popular product used by first time home buyers for their home financing needs. PLEASE KEEP IN MIND: This is not law yet. It will not become law until brought before congress. In bullet points the changes are below:- Maximum seller concessions reduced from 6 percent to 3 percent.
- Minimum down payment increased from 3.5% to 5%
- Minimum credit score increase.
- Significant increases in Mortgage Insurance Premium.
So what does all of this mean? My interpretation of these changes is that regulators want to make FHA irrelevant. I think that HUD wants the abolition of FHA mortgages. So how do they do that without being percieved as pulling the rug out from under our housing market? They change the guidelines to make Conventional Mortgages more attractive than FHA. Essentially, FHA will have the same (more strict) approval guidelines as Conventional, however FHA will be more expensive with higher interest rates and higher Mortage Insurance Premium.
Why am I confident about this? I saw the same thing happen with SONYMA (NY state's mortgage program.) We used to do SONYMA deals on a consistent basis, with Nothnagle Home Securities the Upstate NY leader in SONYMA financing. As soon as NY changed the guidelines and program offerings to be practically the same as FHA, SONYMA application volume fell off of a cliff. I cannot tell you the last time myself of anyone in our office did a SONYMA. The program is still around, but no one sees real benefit in utilizing it. Here is the article from Inman:
"The Obama administration is moving to tighten underwriting standards on
FHA-backed loans by increasing the amount of upfront cash homebuyers must bring
to the table, raising minimum FICO scores for new borrowers, and reducing
maximum seller concessions from 6 percent to 3 percent.
The most obvious
way to increase upfront cash requirements would be to raise the 3.5 percent
minimum downpayment requirement for loans guaranteed by the Federal Housing
Administration.
A bill introduced Oct. 1 by Rep. Scott Garrett, R-N.J.,
would raise the minimum downpayment for FHA loans to 5 percent and prohibit
financing of closing costs. HR 3706, which has 27 co-sponsors, has been referred
to the House Financial Services Committee.
Housing Secretary Shaun
Donovan, briefing committee members on the administration's plans Wednesday,
said there are several ways to make sure borrowers have more "skin in the game"
currently under consideration.
HUD has "made the decision to exercise
our authority to increase the upfront cash that a borrower has to bring to the
table in an FHA-backed loan," Donovan said, but there "are several ways to
accomplish this, and so we are currently analyzing various options to determine
which is the most effective and consistent with our mission."
Testifying
on behalf of the National Association of Realtors, Vicki Cox Golder urged
Congress and the administration to "exercise caution before introducing
proposals that may have a profound adverse impact on our economic recovery."
NAR is strongly opposed to HR 3706, she said, because increasing FHA's
downpayment requirements would make it impossible for many borrowers to use the
program, and "not add a penny to FHA's reserves."
Dan Green, a
Cincinnati-based loan officer for Mobium Mortgage Group Inc., said an increase
in minimum FICO could have "a much larger impact than increasing downpayment
requirements from 3.5 to 5 percent."
The minimum FICO score for
FHA-backed loans was raised from 500 to 580 earlier this year, he said, although
most lenders already have even higher minimums.
"Most consumers are
going to walk into their bank, and their bank will say 620" is the minimum score
needed to obtain a mortgage, Green said.
FHA is in a difficult position,
Green said, because Fannie Mae and Freddie Mac continue to tighten their
guidelines, and that pushes more borrowers who are less creditworthy into FHA
loans.
"They are trying to limit their exposure to the riskiest
borrowers," Green said. "Your median FHA borrower looks decidedly worse today
than 18 months ago."
Green noted that Fannie Mae will implement a minimum
620 FICO score and other underwriting changes over the weekend of Dec. 12 as
part of its rollout of its Desktop Underwriter Version 8.0 software (see Fannie
Mae bulletin).
With claims on its mortgage insurance fund rising, HUD is
also considering raising FHA mortgage insurance premiums, Donovan told the
committee.
Borrowers currently pay an upfront premium of 1.75 percent,
plus annual premiums of 0.5 percent on loans with loan-to-value ratios of up to
95 percent. The annual premium on loans with higher LTVs is 0.55 percent.
Although HUD has the authority to raise the upfront premium to as high
as 3 percent without additional input from lawmakers, annual premiums are at
their statutory limits.
Donovan said HUD is requesting authority from
lawmakers to raise annual premiums for new borrowers, "as this is one of the
most effective means of raising capital" for the FHA's capital reserve fund,
which has dipped below statutory minimums (see story).
Raising the
annual premiums of FHA borrowers would likely be a greater hardship than
increasing their upfront premiums, since the cost of upfront premiums can be
financed into a mortgage, said Faramarz Moeen-Ziai, a mortgage banker at San
Ramon, Calif.-based Bank of Commerce Mortgage.
Moeen-Ziai said that
because an FHA-backed loan is, for all practical purposes, the only option for
most borrowers who can't come up with a 20 percent downpayment, the program
"must survive. If FHA goes away you have nothing to fill its place right now."
He doubts that raising credit scores or minimum downpayments will help
FHA's bottom line in the short term, but is not opposed in principal to raising
minimum downpayment requirements.
"We don't want to kill the golden
goose here just to keep real estate prices inflated by making money available to
a lot of borrowers," Moeen-Ziai said.
That said, he worries that the FHA
is proposing to tighten its standards at about the time the Federal Reserve
plans to shut down a program in which it has kept interest rates low by
purchasing $1.25 trillion in mortgage-backed securities issued by Fannie Mae,
Freddie Mac and Ginnie Mae. The Fed has said it will wind the program down at
the end of March, which could send interest rates up and put downward pressure
on prices.
Most of the changes Donovan outlined can be made with no
additional authority from Congress, and Donovan said HUD expects to provide more
details and public guidance on the changes by the end of January.
"The
good news is that when FHA rolls out changes, they don't do it overnight," Green
said.
If HUD issues guidelines to lenders in January, they aren't likely to
take effect for 60 days, meaning homebuyers have several months before the
latest changes kick in. In September, FHA announced new guidelines for ordering
appraisals and streamlined refinancings, which take effect Jan. 1 (see story).
Donovan said HUD is currently analyzing what the floor for FICO scores
should be, including the relationship between FICO scores and downpayments. HUD
is looking at whether to increase FICO minimums in combination with changes to
other FHA underwriting criteria for lower-downpayment loans.
Reducing
the maximum allowable seller concession to 3 percent would bring FHA "in line
with industry norms," Donovan said. The current 6 percent level exposes the FHA
to excess risk by creating incentives to inflate appraised value, he said.
HUD is also stepping up enforcement to make lenders more accountable, he
said, increasing its review of lender compliance with FHA program requirements.
HUD will develop a "Lender Scorecard" summarizing the performance of lenders who
do business with FHA, and post it on the Web.
In releasing the results
of an actuarial study last month that found FHA's capital reserve ratio has
fallen below a 2 percent minimum established by Congress, Donovan noted that
seller-funded assistance loans were the most substantial pool of troubled loans
on FHA's books, with claim rates 2.5 to three times higher than other loans.
HUD has estimated that seller-funded downpayment assistance was used on
more than 35 percent of all home purchase loans insured by FHA in fiscal year
2007, compared with less than 2 percent seven years earlier.
Congress
abolished seller-funded downpayment assistance on FHA loans in 2008, but HUD
says remaining risks to FHA include its greatly expanded market share and
subprime lenders moving into FHA lending.
In the 12 months ending Sept.
30, FHA insured almost 30 percent of all purchase loans and 20 percent of total
refinances in the housing market, HUD said. First-time homebuyers accounted for
nearly eight out of 10 FHA-backed purchase loans in the second quarter of 2009,
with nearly 50 percent of all first-time buyers relying on FHA-insured loans.
A recent Federal Reserve report demonstrated HUD is "not the new
subprime lender," NAR's Golder said, with the average credit score for current
borrowers having increased to 693, and only 13 percent of purchase borrowers
having FICO scores below 620.
In September, 45 percent of FHA loans had
FICO scores above 700, and less than 5 percent had scores below 620, she said.
The percentage of FHA-backed loans with loan-to-value ratios above 95 percent
fell from 72 percent in 2007 to 62 percent in 2008.
"The reason the
capital reserves have fallen below 2 percent actually has nothing to do with
FHA's current business activities," Golder said. "The decline is simply a
reflection of falling value of homes in their portfolio." "
FHA-backed loans by increasing the amount of upfront cash homebuyers must bring
to the table, raising minimum FICO scores for new borrowers, and reducing
maximum seller concessions from 6 percent to 3 percent.
The most obvious
way to increase upfront cash requirements would be to raise the 3.5 percent
minimum downpayment requirement for loans guaranteed by the Federal Housing
Administration.
A bill introduced Oct. 1 by Rep. Scott Garrett, R-N.J.,
would raise the minimum downpayment for FHA loans to 5 percent and prohibit
financing of closing costs. HR 3706, which has 27 co-sponsors, has been referred
to the House Financial Services Committee.
Housing Secretary Shaun
Donovan, briefing committee members on the administration's plans Wednesday,
said there are several ways to make sure borrowers have more "skin in the game"
currently under consideration.
HUD has "made the decision to exercise
our authority to increase the upfront cash that a borrower has to bring to the
table in an FHA-backed loan," Donovan said, but there "are several ways to
accomplish this, and so we are currently analyzing various options to determine
which is the most effective and consistent with our mission."
Testifying
on behalf of the National Association of Realtors, Vicki Cox Golder urged
Congress and the administration to "exercise caution before introducing
proposals that may have a profound adverse impact on our economic recovery."
NAR is strongly opposed to HR 3706, she said, because increasing FHA's
downpayment requirements would make it impossible for many borrowers to use the
program, and "not add a penny to FHA's reserves."
Dan Green, a
Cincinnati-based loan officer for Mobium Mortgage Group Inc., said an increase
in minimum FICO could have "a much larger impact than increasing downpayment
requirements from 3.5 to 5 percent."
The minimum FICO score for
FHA-backed loans was raised from 500 to 580 earlier this year, he said, although
most lenders already have even higher minimums.
"Most consumers are
going to walk into their bank, and their bank will say 620" is the minimum score
needed to obtain a mortgage, Green said.
FHA is in a difficult position,
Green said, because Fannie Mae and Freddie Mac continue to tighten their
guidelines, and that pushes more borrowers who are less creditworthy into FHA
loans.
"They are trying to limit their exposure to the riskiest
borrowers," Green said. "Your median FHA borrower looks decidedly worse today
than 18 months ago."
Green noted that Fannie Mae will implement a minimum
620 FICO score and other underwriting changes over the weekend of Dec. 12 as
part of its rollout of its Desktop Underwriter Version 8.0 software (see Fannie
Mae bulletin).
With claims on its mortgage insurance fund rising, HUD is
also considering raising FHA mortgage insurance premiums, Donovan told the
committee.
Borrowers currently pay an upfront premium of 1.75 percent,
plus annual premiums of 0.5 percent on loans with loan-to-value ratios of up to
95 percent. The annual premium on loans with higher LTVs is 0.55 percent.
Although HUD has the authority to raise the upfront premium to as high
as 3 percent without additional input from lawmakers, annual premiums are at
their statutory limits.
Donovan said HUD is requesting authority from
lawmakers to raise annual premiums for new borrowers, "as this is one of the
most effective means of raising capital" for the FHA's capital reserve fund,
which has dipped below statutory minimums (see story).
Raising the
annual premiums of FHA borrowers would likely be a greater hardship than
increasing their upfront premiums, since the cost of upfront premiums can be
financed into a mortgage, said Faramarz Moeen-Ziai, a mortgage banker at San
Ramon, Calif.-based Bank of Commerce Mortgage.
Moeen-Ziai said that
because an FHA-backed loan is, for all practical purposes, the only option for
most borrowers who can't come up with a 20 percent downpayment, the program
"must survive. If FHA goes away you have nothing to fill its place right now."
He doubts that raising credit scores or minimum downpayments will help
FHA's bottom line in the short term, but is not opposed in principal to raising
minimum downpayment requirements.
"We don't want to kill the golden
goose here just to keep real estate prices inflated by making money available to
a lot of borrowers," Moeen-Ziai said.
That said, he worries that the FHA
is proposing to tighten its standards at about the time the Federal Reserve
plans to shut down a program in which it has kept interest rates low by
purchasing $1.25 trillion in mortgage-backed securities issued by Fannie Mae,
Freddie Mac and Ginnie Mae. The Fed has said it will wind the program down at
the end of March, which could send interest rates up and put downward pressure
on prices.
Most of the changes Donovan outlined can be made with no
additional authority from Congress, and Donovan said HUD expects to provide more
details and public guidance on the changes by the end of January.
"The
good news is that when FHA rolls out changes, they don't do it overnight," Green
said.
If HUD issues guidelines to lenders in January, they aren't likely to
take effect for 60 days, meaning homebuyers have several months before the
latest changes kick in. In September, FHA announced new guidelines for ordering
appraisals and streamlined refinancings, which take effect Jan. 1 (see story).
Donovan said HUD is currently analyzing what the floor for FICO scores
should be, including the relationship between FICO scores and downpayments. HUD
is looking at whether to increase FICO minimums in combination with changes to
other FHA underwriting criteria for lower-downpayment loans.
Reducing
the maximum allowable seller concession to 3 percent would bring FHA "in line
with industry norms," Donovan said. The current 6 percent level exposes the FHA
to excess risk by creating incentives to inflate appraised value, he said.
HUD is also stepping up enforcement to make lenders more accountable, he
said, increasing its review of lender compliance with FHA program requirements.
HUD will develop a "Lender Scorecard" summarizing the performance of lenders who
do business with FHA, and post it on the Web.
In releasing the results
of an actuarial study last month that found FHA's capital reserve ratio has
fallen below a 2 percent minimum established by Congress, Donovan noted that
seller-funded assistance loans were the most substantial pool of troubled loans
on FHA's books, with claim rates 2.5 to three times higher than other loans.
HUD has estimated that seller-funded downpayment assistance was used on
more than 35 percent of all home purchase loans insured by FHA in fiscal year
2007, compared with less than 2 percent seven years earlier.
Congress
abolished seller-funded downpayment assistance on FHA loans in 2008, but HUD
says remaining risks to FHA include its greatly expanded market share and
subprime lenders moving into FHA lending.
In the 12 months ending Sept.
30, FHA insured almost 30 percent of all purchase loans and 20 percent of total
refinances in the housing market, HUD said. First-time homebuyers accounted for
nearly eight out of 10 FHA-backed purchase loans in the second quarter of 2009,
with nearly 50 percent of all first-time buyers relying on FHA-insured loans.
A recent Federal Reserve report demonstrated HUD is "not the new
subprime lender," NAR's Golder said, with the average credit score for current
borrowers having increased to 693, and only 13 percent of purchase borrowers
having FICO scores below 620.
In September, 45 percent of FHA loans had
FICO scores above 700, and less than 5 percent had scores below 620, she said.
The percentage of FHA-backed loans with loan-to-value ratios above 95 percent
fell from 72 percent in 2007 to 62 percent in 2008.
"The reason the
capital reserves have fallen below 2 percent actually has nothing to do with
FHA's current business activities," Golder said. "The decline is simply a
reflection of falling value of homes in their portfolio." "
If you are depending on FHA financing after the the New Year, I would insist that you do not get discouraged. Every problem poses a solution. Just because these are changes that HUD is calling on Congress to pass does not neccessarily mean they will all become law.
However, at the very least I believe that minimum credit score increases or minimum down payment increases are on the table. So I strongly recommend planning accordingly. Loan officers with reputable local mortgage banks are experts at developing strategies for increasing borrowers credit scores. In regards to coming up with more money for a down payment, this time of the year could not be any more perfect to start planning. Here are some budgeting tips before you start whipping the plastic out of your wallet this holiday season:
- A great gift for someone does not have to be expensive. A great gift is a thoughtful one.
- If family or friends are asking what's on your wish list. Let them know that you are planning on buying a house and the best gift would be check or cash for your first home reserve fund.
- Most online banking websites have budgeting software that allows you to track your expenses by category just like the frugal John Pierpont Morgan did with his personal finances. This will make it easy to cut wasteful spending and make you more aware of your personal expenditures.
No comments:
Post a Comment