The FHA Program: Recent News, Changes, Financial Condition, and General Processing Notes

By: Rob Chrisman • Thu, Dec 26 2013, 10:27 AM

Echoing what lock desks are seeing, and once again causing some lenders and Realtors to take a fresh look at overhead, the MBA Mortgage Application Index was down -6.3% vs. -5.5% from the week prior. Refinance applications were down -7.7% while purchase applications were down -3.5%. The refis have left the market, "for sale" inventories are low, and QM restrictions with many investors loom. With this number, residential apps are back to where they were 13 years ago - but are the number of lenders and their staffing levels?

I can think of no greater crusader against the FHA, than Resident Fellow at the American Enterprise Institute, Ed Pinto. In a recent NY Times article, Lisa Prevost writes, "One of the most vocal critics (of the FHA) is Edward J. Pinto, who calls the terms 'predatory' and 'abusive'. He argues that the majority of F.H.A. loans are at high risk for default should the economy tip back into recession, but that borrowers have no way of knowing how safe their loans are, because the agency prices all loans the same. Low-risk borrowers, he said, are overcharged to subsidize those at higher risk. "The consumer who has the very-low-risk loan doesn't even know he might be better off going through the private sector," Mr. Pinto said. "They may assume that the government is protecting their interests." The article is entitled "The Downside to FHA Loans," and while there isn't anything too earth shattering in the investigation, Pinto wants to toast marshmallows on the FHA's business model v. a rebuttal by David Stevens of the MBA (and ex-FHA Commissioner), anyone in the industry can relish in the exchange of ideas on the topic of private finance versus public finance.

As a reminder, the FHA has issued new manual underwriting requirements. On December 11, 2013, HUD published in the Federal Register its final notice. The manual underwriting requirements are applicable for purchase transactions and all credit qualifying FHA refinance transactions. HUD has made five amendments to the proposed manual underwriting requirements: (1) they address the issue of borrowers who exceed the 31% housing-to-income ratio, (2) address the relationship between compensating factors and ''stretch ratios'' that permit borrowers to exceed the housing payment and total debt-to-income ratios under certain FHA mortgage insurance programs, (3) the rule establishes additional compensating factors that can be used to qualify borrowers who exceed FHA's standard housing payment and debt to income ratios, (4) HUD has reduced the credit score (from 620 to 580) below which compensating factors may not be cited and the standard ratio guidelines may not be exceeded, and lastly (5) HUD has extended the applicability of these underwriting policies to FHA-to-FHA rate and term refinance transactions (no cash-out) and credit-qualifying FHA streamline refinance transactions. The full release can be found in the Federal Register.

On December 13th, HUD released its Fiscal Year 2013 Annual Report to Congress on the Financial Status of the Mutual Mortgage Insurance Fund, which reports the results of an independent actuarial evaluation of the Fund. According to the independent actuary, the Fund's value has improved by $15 billion since last year, and is currently valued at negative $1.3 billion. According to the release, this change represents a 92% improvement in the capital reserve ratio rising from negative 1.44% to negative 0.11%. The independent actuary now estimates that the Fund will reach the required 2% reserve ratio in 2015. Scott Olson, Executive Director of the Community Home Lenders Association (CHLA), released the following statement in response to the release of the FHA MMIF actuarial report "In responding to the latest FHA projections, it is important to keep in mind that the quality of new FHA loans is very strong. In fact, the Community Home Lenders Association believes that FHA can best serve its mission of meeting consumer mortgage needs by lowering its annual premiums - while continuing its activities to maximize recoveries of distressed loans through loan modifications, short sales, and loan sales." HUD's Annual Report to Congress on the Financial Status of the MMI Fund and the accompanying actuarial reviews are available on HUD's site.

And as another reminder, in a bid to perhaps stay relevant, though in the FHA's own words, to continue "its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances," borrowers may now be eligible for an FHA loan just one year after experiencing a short sale, foreclosure, or even a bankruptcy. The news came via a mortgagee letter (13-26) posted on HUD's website back in August. Borrowers are asked, "Did You Experience an "Economic Event?" In order to get approved for an FHA loan just one year after experiencing such a massive credit hit, you must prove it was due to an "Economic Event," otherwise known as unemployment or a "severe" reduction in income. Of course, by severe reduction they're only talking about a minimum 20% reduction in household income for a period of at least six months.

As any underwriter knows, it's pretty common for individuals to see their income fluctuate like that. And the FHA is even allowing those with seasonal or part-time employment to qualify under these new rules. However, there are a few more checks and balances. The lender must analyze the borrower's credit to determine that they were a sound borrower before the Economic Event took place, and that their credit only went downhill after the incident. Additionally, borrowers must re-establish "Satisfactory Credit" for a minimum of 12 months prior to receiving their FHA loan. In other words, your credit report should be clear of any late housing or installment payments during the past 12 months, or any major derogatory events on revolving lines of credit. Additionally, a year must have passed since the date of the foreclosure, deed-in-lieu, short sale, or bankruptcy.

Occasionally I am asked about energy efficient mortgages. "The HUD EEM and the HERS Rating" is one appropriate title. Many believe that the Energy Efficient Mortgage (EEM) is the best way for FHA borrowers (purchase and refinance) to make a house more energy efficient and affordable. But, it has one requirement in the guideline that nullifies the whole program; the requirement for a HERS rating. There is no network of nationwide HERS trainers so the program is basically null and void. Read more about it here. Proponents are asking that those interested click the link to send HUD an email requesting the HERS rating be eliminated from the guidelines.

Borrowers often ask, "Should I get an FHA or conventional loan?" LOs generally know that the qualification process will determine the best type of loan. Many people have many misconceptions regarding FHA financing to purchase a home that there are several hurdles and restrictions to surpass. FHA guidelines do have some property requirements that are more detailed than those on conventional mortgages, but otherwise FHA has fewer limitations than Fannie Mae and Freddie Mac and enables more families seeking home ownership the opportunity to purchase a home. We all know that FHA loan programs, and costs, are almost in a teeter-totter competition with conventional conforming loans, given changes in mortgage insurance, MI rates, gfee changes, loan level price adjustment increases, and so on.

The FHA appraisal includes a somewhat more detailed inspection than conventional, and FHA appraisers will call out items that require repair before a loan can be funded. The basic rule for FHA and property requirements is any issue with the property that is considered a health or safety issue must be corrected. With condominiums, many buyers are perfect candidates for FHA financing, but many condominiums are not FHA eligible. FHA maintains a list of approved condo homeowners associations. Conventional loans also have requirements for condos but they are a bit less stringent.

FHA's can have higher loan limits in certain counties than conventional loans, and the minimum down payment for FHA is only 3.5%. FHA also allows non-occupant co-borrowers that are family members and use what are known as "blended ratios," meaning that the income to debt ratios of the primary applicant who will occupy the home do not matter as long as the total ratios fit the guidelines. Any qualified applicant can use FHA financing to purchase a home regardless of whether it is their first home or fifth, but FHA financing cannot be used to purchase investment property or second homes. Mortgage insurance is required on all FHA mortgages regardless of loan to value.

With conventional mortgages there are options to finance the mortgage insurance premium or pay a monthly premium; if paying monthly it is possible in the future to have the premium and insurance discontinue. With FHA there is a financed mortgage insurance premium AND a monthly premium. The rates on both the upfront and monthly have increased significantly over the past few years and effective with loans after June 1, 2013 the monthly premium is paid for the life of the loan. Most conventional lenders, and all mortgage insurance companies, have higher score requirements and charge higher rates for lower credit scores. So to sum up, FHA financing has more paperwork to sign than a conventional mortgage but otherwise is generally an easier qualification process.

Well, it's back to work for many people, especially those trying to fund loans by the end of the month. Rates have been creeping higher, given the continued news showing the U.S. economy is grinding higher, or at least recovering. The latest was Tuesday's New Home Sales. "The slight drop of new home sales in November from the month prior is no cause for alarm as the market remains near a five-year high in sales. Homebuyers took a momentary pause when interest rates increased earlier this year and as rates fell thru October they are returning to take advantage of the market." Durable Orders, always volatile depending on things like aircraft or washing machine orders, also exceeded expectations. Today we'll have the weekly Jobless Claims. So far this morning fixed income securities are virtually unchanged from Tuesday's closing levels (with the 10-yr.'s yield at 2.98%).