The 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.
FHA 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.
FHA 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 goals.
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 borrowers."