The Federal Housing Administration (FHA) press release began with:
“Federal Housing Administration (FHA) Commissioner David Stevensrecently announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to home ownership for under served communities.”
That all sounds good doesn’t — but I find myself wondering if the two “pieces” of that statement could ever be achieved by the same origination. To serve the “under served communities” in the home buying market means working with the higher-risk clients.
If you are a home buyer and have a 750 credit score, 20% down payment, and are looking to purchase a home well within your means (i.e. less than 20% of net income) the banks will still be following all over you.
However, you drop one of those pieces of the puzzle down into the marginal category and for many people the FHA program becomes the best alternative. The basic question is how many people in the under served community will now become — how many will no longer be served?
I’m not advocating that everyone in the under served community should be given a loan, the experience of the past four years should prove that “bad” mortgages are most-likely going to be “bad” for a long time. It is simply that FHA is trying to “act” like this change will not drastically adjust the number of people that qualify for their products.
The FHA plans to increase the mortgage insurance premium, update the combination of FICO scores and down payment, while reducing the amount of possible sellers concessions to three percent (3%).
“Striking the right balance between managing the FHA’s risk, continuing to provide access to under served communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens. “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for under served communities.”
I am a big fan of the revised credit scores and down payments for borrowers — the lower your credit score the more you have to put down. This makes too much sense to have come from the government. A buyer with a 580 credit score or higher will be able to purchase a home with 3.5% down, but if that credit score is below 580 then the down payment will increase to 10 percent.
The reduction of allowable buyer concessions from 6% to 3% isn’t a huge issue. This will have the most impact on buyers looking for homes priced below $100,000 where the fixed charges push the percentage up and will leave though looking for more money.
On the point of the mortgage premium insurance, I’ll admit that I’m still trying to figure the whole thing out, the press release states:
- Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
- The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
- If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
- This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing.
- The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
Now, I’m man enough to admit that some of that sounds like Greek and it a bit deeper than I normally go. Which is why I think heading over to The Mortgage Report by Waterson Mortgage’s Dan Green and get it straight from one of the smartest mortgage guys I know.
Basically, all of these are designed to enhance the bottom-line of the FHA programs which is a good return on investment for the American people.
You are completely correct! What is often swept under the carpet is that Basel III is nothing new- all other industries are held to standards that guarante “a true and fair view” of their prospects. So the FHA is saying it is underwater by the “new” standards and is now trying to square a circle. Good luck! (And there’s no fresh bailout money where the last came from …)