A Little History of the FHA to put things in Perspective & Compare Ratio Thoughts

I confess that I own three type writers: the first helped my Mom at Stanford in the 1940's, the second I used to teach myself how to type while in high school, and the third I used in college in San Diego. I have them stored in the basement next to my floppy disks with Lotus files that I can no longer access. In the finance world, the typewriter was once a mainstay of the office, as was liquid paper. They were invented in the early 1700's, mass produced right after the Civil War, and the peak of production was in the 1950's. The last company to exclusively produce the typewriter, Godrej and Boyce, has recently shut down production. Will 30-yr mortgages go the way of the typewriter? Some say yes, and that mortgage duration and rate should be much more closely tied with the duration and rate of what banks are paying their depositors. Aside from using swaps and derivatives, what bank wants to own a 30-yr security paying 2.5% and be paying its depositors 3%?

Few think that the FHA will go away, although there are thoughts of somehow melding it in with Fannie & Freddie. But many look at today's Federal Housing Administration (FHA) and think it hasn't changed since it was created in 1934 - it has. The FHA initially insured fully amortizing 20-year loans combined with a 20% down payment. As a result, homebuyers accumulated nearly 30 percent in earned equity after four years, yet over its first 20 years, the FHA paid claims on only 5,712 properties, for a cumulative claims rate of 0.2 percent.

Industry analyst Ed Pinto continues with the history lesson. "Lulled by this success, Congress periodically reduced the minimum down payment and extended the maximum loan term. By 1956, the FHA's maximum loan-to-value (LTV) ratio stood at 95% and maximum loan term was 30 years. For a borrower leveraged at the maximum LTV and term, earned equity after four years totaled 9%, about enough to cover the cost of selling the home. A borrower and the FHA's success depended highly on unearned equity accruing from house price appreciation. Higher leverage is a double-edged sword. It creates a windfall of unearned equity for home buyers and reduces losses for the FHA when home prices are increasing rapidly, but it exposes home buyers to foreclosure when prices were rising more slowly or decline. At the same time, the shift to higher leverage caused the FHA's foreclosure rate to increase dramatically and inexorably over the decades." Recent figures show that over 17% of all FHA loans were delinquent, and that total delinquencies increased by 77,000 over August, the largest one-month increase since FHA Watch began tracking monthly delinquencies in September 2011.

An industry vet from Nevada writes, "The FHA program was a wonderful program.  Now, like everything else, the government has wrecked it.  The MI is so high, the only reason you go FHA is because you don't have the credit scores for FNMA/FHLMC 5% down.  Is that subprime or what? The FHA winds up with the less qualified borrower, and then those idiots wonder why the loss factor is higher."

And experts have wondered about the FHA's net worth - it isn't good, and below the minimum capital requirements set by Congress. (Does Congress care, or know?) The September estimate of the FHA's generally accepted accounting principles (GAAP) net worth is -$28.3 billion, down from -$16.3 billion in September 2011. The capital shortfall stands at $48 billion (using a 2 percent capital ratio) and $67 billion (using a 4 percent capital ratio).

(The folks at GNMA, however, are having a banner year. They are different, remember: the FHA insures loans whereas Ginnie packages them up into securities. With roughly only 100 employees, Ginnie made about $1.2 trillion in the last fiscal year, or about $13 billion per employee! More on Ginnie Monday.)

Returning to the FHA, the industry carefully watches these delinquency numbers. Robert Pieklo with American Financial Resources points out that, "Companies should watch Neighborhood Watch Compare ratios. Streamlines were taken out of the equation this month (quarter end). The national default rate is 1.25. If a borrower has 2 life events occur out of 100, you are in bad shape. But companies are in a weird spot, especially those that have a slightly higher CR.  It seems that FHA's market share is dropping like a brick - certainly for us the 700+ FICO score loan no longer best ex's into a FHA loan. A conventional loan with MI is much better so it's hard to get enough of the better borrower's in to one's numbers."

Let's move on to some relatively recent investor changes that will give us a flavor for some recent trends. Full details can be found in the investor bulletins.

PHH Mortgage implemented credit score adjustments for FHA, VA, and USDA loans locked on or after October 12th.  A +0.500 adjustment replaces the previous +0.250 adjustment for borrowers with credit scores of 720 and over, while borrowers with non-traditional credit will be subject to a -1.250 adjustment, which replaces the previous adjustment of -0.500.  SOAR and the PHH rate sheet have been updated accordingly.

As of October 12th, all new Attached Planned Unit Developments (PUDATs) registrations for conventional conforming and non-conforming loans are subject to review under PHH's updated guidelines.  These guidelines state that the project cannot consist of single-width manufactured housing units and that it must be eligible, entirely completed, adequately covered by its insurance policy, and reviewed within three months prior to the Note date; see the PHH guide for specifics of these requirements.  For Tier 3 and 6 registrations, the revised review protocol is similar to the current condo project review process, and Tier 7 correspondents will responsible for reviewing PUDATs based on the updated requirements.  The changes apply to all conventional conforming and non-conforming loans with the exception of HARP and HomePath transactions.

The product description for Tier 3, 6, and 7 VA loans has been updated to clarify PHH's current policy of rounding the final loan amount down to the nearest dollar for purchase and cash-out transactions.  PHH reminds clients that, for VA IRRRLs, the loan amount should be rounded down to the nearest $50.

Warehousing lending managers are in good spirits these days: across the board, their profits are way up thanks to high commitment volumes.  The trend is predicted to continue well into 2013 (due in part to QE3), which has everyone optimistic.  Capacity hasn't been a concern when it comes to obtaining warehouse credit, either.  To give an idea of the numbers, Wells Fargo's warehouse bank, in the number one slot, recorded $7 billion in commitments last June, and other banks have experienced increases in commitments ranging from 13% to 123%.  The only institution that isn't dancing a jig is Bank of America, which recorded a mere $3 billion in commitments in June, a 78% decrease from a year prior.  (Courtesy of National Mortgage News.)

The Nationwide Mortgage Licensing System has posted the license renewal dates for all states; see the website.

Freddie Mac is making a number of revisions to its Servicer Success Scorecard criteria, which will go into effect in 2013.  Changes will affect performance criteria for investor reporting, including cash management, data integrity, and operational management; and default management, including loss mitigation, workout effectiveness, default timeline management, and data integrity.  Note that FHA, VA, and USDA loans will be exempt from all default management criteria apart from data integrity criteria.  For the full details of the changes, see the relevant bulletin on the Freddie website.

In an effort to reduce the risk of payment shock, Freddie is updating various requirements for ARM loans.  ARMs with initial periods of five years or less will be required to have initial and periodic caps less than or equal to 2%, and borrowers of such loans will need to be qualified at either the note rate plus 2% or the fully indexed rate.  Freddie will announce the exact date on which the changes will go into effect in the near future.

Both LP and the Affordable Income and Property Eligibility tool will be updated on November 18th to reflect the FHFA's median income estimates for 2012, which will be applied to all loans submitted thereafter.  In addition to these updates, Freddie is revising its definition of "underserved area," as a property with a Home Possible mortgages in such an area is not subject to any income limit.

Fannie Mae has updated its "Broker Price Options and the Valuation Process" job aid and the "Retrieving Fannie Mae's Response for HAFA Short Sale, HAFA Deed-in-Lieu and Fannie Mae Short Sale BPOs" section of the User Guide.  The updated versions are both available via www.efanniemae.com.

Wells Fargo will be revising its non-conforming ARM adjustment cap structure from 5/2/5 to 2/2/5 for Best Effort locks and registrations dated November 12th and after.  As a result of this change, the first adjustment cap can change the previous interest rate by no more than 2% in either direction, which also applies to each subsequent adjustment.  The lifetime cap is 5% over the initial note rate, and there is no downward cap apart from the margin.

Sellers are reminded that the "delivery" and "purchase by" dates for DU Refi Plus refinances of non-Wells-serviced loans are approaching-these loans should be received on or before November 9th, as they must be purchased by November 30th at the latest.  Sellers must assign loans that are delivered in a mandatory commitment to the commitment on or before November 13th.  Note as well that, beginning November 10th, DU Refi Plus transactions not coded as being Wells-serviced will be recommended for non-purchase.

In light of the current regulatory climate, Wells reminds sellers that all income and asset sources that are used to qualify borrowers must adhere to local, state, and federal laws and that it will not consider any loans whose income and asset sources do not comply for qualification.

Fifth Third has applied a 50bps price improvement to all of its purchase transactions, which will be effective for all locks, re-locks, and float-downs until November 30th.

As a reminder, Fifth Third will permit financing concessions on conforming and portfolio products so long as they are used within the limits of the product description, LTV, and occupancy type; originate from an interested party; and are put towards reducing the loan's interest rate, funding a buydown plan, or otherwise permanently reducing mortgage costs.  Amounts that exceed these limits are considered to be sales concessions, which also include "vacations, furniture, automobiles, property allowances," or other nice things granted by an interested party.  Fifth Third does not permit undisclosed seller concessions.

Fifth Third reminds clients that investment properties in Florida are still considered an ineligible occupancy type.  This applies to all loans regardless of collateral review type, including VA IRRRLs, FHA Streamline refinances, HASP Open Access, and DU Refi Plus.

With the USDA's announcement about FY2013 funding availability, Flagstar is once again offering a refinance option to Rural Housing borrowers.


Here is part 2 of 3 of some political quotes, with neither party targeted:
Politicians are the same all over.  They promise to build a bridge even where there is no river.
~Nikita Khrushchev
When I was a boy I was told that anybody could become President; I'm beginning to believe it.
~Clarence Darrow
 Why pay money to have your family tree traced; go into politics and your opponents will do it for you.
~Author Unknown
If God wanted us to vote, he would have given us candidates.
~Jay Leno
Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel.
~John Quinton
Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.
~Oscar Ameringer
I offer my opponents a bargain: if they will stop telling lies about us, I will stop telling the truth about them.
~Adlai Stevenson, campaign speech, 1952