HUD is preparing to implement a few new policies that will no doubt affect your pipeline/loan application process.
Last week, HUD and the FHA invited public comment on three of those
policy changes, which are part of FHA's strategy to "strengthen their
capital reserves".
The proposed changes which are
either tweaks to other recent revisions or have been telegraphed by FHA and HUD
in earlier Congressional testimony, notices to lenders, or press releases will:
- Update
the combination of credit and down payment requirements for new borrowers
- Reduce allowable seller concessions from six
to three percent.
- Tighten underwriting standards for manually
underwritten loans
FHA has been
scrambling to strengthen its financial situation since an audit late in 2009 showed
that the capital ratio of its Mutual Mortgage Insurance Fund (MMIF) had fallen
below its statutorily mandated threshold.
In recent months the Administration has raised premiums on its FHA
insurance, prohibited seller-financed down payment assistance, stepped up enforcement
of its regulations, tightened appraisal rules, banned several lenders from
writing FHA guaranteed loans and brought suit against others. READ MORE
In announcing the current revisions FHA said
it is concerned with the issue of layering risk. The chance of default is compounded in loans
where there are low credit scores, high loan to value ratios, high
debt-to-income ratios, and low or zero cash reserves associated with a loan.
Under the
proposed requirements for credit and down payments, new borrowers will be
required to have a minimum FICO score of 580 to qualify for the popular 3.5
percent down payment program. Borrowers
with lower scores will have to put up at least 10 percent down to qualify for
FHA guaranteed financing and those with scores below 500 will not be eligible
for FHA guarantees of any type.
FHA said
that few borrowers will be affected by the change as lenders themselves have primarily
used higher qualifying scores. In 2009, approximately
93 percent of FHA loans had loan values above 90 percent, and less than 2
percent of those borrowers had credit scores below the proposed credit score threshold
of 580. Those borrowers in the higher LTV/lower
FICO category, however, have proven to be unacceptable risks. Borrowers with LTVs over 90 percent and
scores under 580 have a delinquency rate of 30 percent while those in with LTVs up to 90
percent and with scores under 500 have a rate of 35 percent. Loans given to borrowers above the proposed credit
score floors have a rate of 7.63 percent.
Among the comments sought by FHA regarding the above changes is
suggestions for acceptable score ranges for lenders using scoring models other
than FICO
FHA is
considering providing a temporary exception to the credit/down payment changes
in the case of a borrower who is refinancing to reduce indebtedness under
earlier changes announced by FHA.
FHA has required
that seller concessions to borrowers in excess of six percent be treated as an
inducement to purchase and that the FHA mortgage amount be reduced
accordingly. The new rule would reduce
that allowed concession to 3 percent, with the permitted mortgage amount reduced
dollar for dollar where concessions are given above that level. FHA said that this will bring the rule in
line with the guidelines of most conventional lenders. FHA said it has found that borrowers who had
been allowed to take concessions above 3 percent had a significantly higher
risk of losing their homes. For example,
loans written in 2008 with no concessions had a claim rate against the FHA
guarantee of 1 percent; seller concessions up to 3 percent had a rate of 1.2
percent while those loans with concessions above 3 percent had a claim rate of
1.7 percent.
The third
proposed change outlines compensating factors which can be used by lenders to
qualify loans that, largely because of a limited or nontraditional credit
history on the part of the borrower, may need to be manually underwritten. Under the change, lenders will be required to
consider those factors which are the best predictive indicators of loan
performance.
Acceptable compensating factors
include:
-
A
documented significant decrease or minimal change in housing expense coupled
with a documented 12 month housing payment record with no more than one 30-day
late payment.
-
Documented
significant additional income that is not considered effective income.
-
Documented
cash reserves of at least 3 monthly mortgage payments including principal,
interest, taxes, and insurance.
-
Special
"stretch" debt ratio provisions for Energy Efficient Mortgages.
The
comment period ends on August 16, 2010. Here’s how you can provide feedback:
- Visit http://www.regulations.gov
- Scroll down about 1/3rd of the page and you will see a link for “What’s Hot –Most Visited Regulations”
- Click on that link and you will see a list of pending regulation. Select the notice: “Federal Housing Administration Risk Management Initiatives: Reduction of Seller Concessions…”
- That will take you to a page where the document outlining these changes is available for review. Towards the top right-hand of the page, you will see a link in light-blue ink that reads “Submit Comment”…click on that link and fill-in your information, and type-in your comment.
- Hit “submit” and let your voice be heard.