Federal Housing Administration (FHA) says that qualified buyers are currently underserved
by the housing market. The economic
crisis significantly constrained credit, making it tough for anyone with less
than perfect credit to obtain a mortgage.
Perhaps as many as 13 million people with credit scores below 752, the
average for Freddie Mac and Fannie Mae loans, are shut out of the market. This hurts American families and undermines
efforts to build more stable communities.
has issued a new handbook titled "Blueprint
for Access" outlining additional steps the agency is taking to expand
credit access to these borrowers guided by several principles to do so
responsible. The first is to encourage
housing counseling to ensure borrowers are well-educated about home-buying and
mortgage financing. The second is to
establish clear rules of the road for lenders to ensure them they can make
loans without fear of unanticipated consequences, and the third is to avoid
unsound lending practices by building on the reforms already in place to
support safe lending.
says that research shows that the first principle, encouraging housing
counseling, works. There is a strong
correlation between counseling and mortgage performance. Borrowers who receive counseling have a
delinquency rate that is 29 percent lower for first-time homebuyers and 15
percent lower overall than borrowers who do not. As the first step in the new Blueprint for
Access FHA is launching the HAWK pilot program, Homeowners
Armed with Knowledge.
The four-year pilot will permit homebuyers
to qualify for savings on FHA-insured mortgages if they complete HUD-approved
housing counseling provided through independent nonprofit organizations. The counseling is aimed at improving buyers'
budgeting skills and gives them individualized, objective advice on
understanding the rights and responsibilities of homeownership, addressing
credit and savings barriers, and meeting their overall housing and financial
Homeowners who complete the
counseling before signing a home purchase contract and then complete additional
pre-closing counseling will receive a 50 basis point reduction in the upfront
FHA mortgage insurance premium (MIP) and a 10 basis point reduction in the
annual FHA MIP. Choosing to participate in post-closing counseling and maintaining
the mortgage for two years with no serious delinquencies will bring
participants an additional 15 basis point reduction in annual MIP. FHA
says the average buyer would save approximately $325 a year - or almost $9,800
over the life of their loan.
The second and third principles will
be addressed by a new Quality Assurance Initiative. FHA says that clarity with respect to quality
assurance measures enhances access for potential borrowers because lenders can
originate loans confidently-knowing their mortgages meet FHA standards. FHA
hopes that its actions will reduce the use of credit overlays by lenders.
The initiative focuses on four areas,
clarifying policy, enhancing the approach to assessing loan quality, sampling a
larger variety of loans, and supplementing lender performance metrics.
The first step in clarifying policy is
a new FHA Handbook, the first section of which, "Application through
Endorsement," was published last October.
Subsequent sections on oversight and compliance, appraisal guidance,
servicing, and other topics will be published throughout this year. FHA is also
developing a new methodology for evaluating underwriting defects that will be
more descriptive; identifying specific defects, their related causes, and
levels of severity.
The agency will be expanding its loan
sampling away from its primary emphasis on higher-risk loans to include a
larger sampling of performing loans. This approach should provide a more
balanced view of underwriting quality.
FHA also plans to introduce a national
lender performance metric to supplement its Lender Compare Ratio which compares
the rate of early defaults and claims for single-family loans within a
geographic area. This new metric will
assess lender performance based on the default rate within three credit score
bands and compare it to an FHA target rate rather than to the lender's peers.
"This is a win for families, FHA,
lenders, realtors and the overall market, which is why we are very excited
about its potential impact, said Shaun Donovan, Secretary, U.S. Department of
Housing and Urban Development. "We want to create an environment that
encourages responsible behavior and provides clear rules of the road so lenders
can originate loans without fear of unanticipated consequences. We want lenders
to be able focus on the quality of their processes and lend to all qualified