Rumored & Actual FHA Changes & Potential Implications

There's a lot of gossip about what might and might not happen with changes to FHA in 2010 and I wanted to put out a cheat sheet.

• Premium Changes - rumored
  • Currently 1.75% maximum but could go to 3% - This won’t have a huge impact but in situations where the choice between conventional and FHA is close, this will make conventional the more appealing option.  Further, higher MIP’s could push some loans into the high cost loan category when MIP’s are closer to 3%.  I’d be surprised if this happens during the spring market though.
  • Monthly factors should stay the same – So far, the word is that annual/monthly MIP factors will remain the same.
• Down Payment Changes - rumored
  • No decision yet but may go to 5% – There is serious talk about increasing the statutory minimum contribution from 3.5% to 5%.  Approximately 51% of the purchase market is first time homebuyers and approximately 60% of them use FHA.  This could hurt the 2010 purchase transaction count and enhance the appeal of conventional loans.  I’d be surprised if this changed happened during the spring market though.
• Seller Paid Closing Costs  - rumored
  • Changed to 3% (has effect of increasing average down payment) – At the same time as they are considering raising the statutory minimum contribution, HUD is also talking seriously about lowering seller contributions from 6% to 3%.  These two changes, if they happen together, would effectively increase the down payment requirement to over 5%.  This would again increase the appeal of conventional lending.  I’d be surprised if this happened during the spring market though.
• Appraisal Ordering Procedures - actual
  • Cost implications – Without getting into detail, FHA is implementing a HVCC-like appraisal protocol.  While it is different, many will be going to AMC’s and similar vendors for FHA appraisals as well.  This will probably have the effect of slightly increasing appraisal turnaround times but it will increase the cost of appraisals for consumers.  Given the importance of 3^rd party costs, it will be important to find quality FHA appraisal vendors but they’ll have to be cheaper than present vendors (MN FHA appraisals cost $465 at Streetlinks for example).
  • Clumsy integrations like HVCC? – Some providers, like Streetlinks, are going to be ready for the new HUD appraisal rule but many won’t be.  For instance, how can a lender fill out the FHA connection without knowing who the appraiser is?  Does that violate the new rule?  These unanswered questions are illustrative of a bumpy rollout that could cause loan origination obstacles.
• New Mortgagee Requirements - actual
  • 1 million net worth (staged up to 2.5 million) – Turnaround time, turnaround time, turnaround time.  As smaller brokers and correspondents don’t meet the first year net worth of requirements, they’ll be at the mercy of larger lenders for approval.  Some will meet the larger lender’s requirements by having good neighborhood watch records and internal controls and others won’t.  The ones that won’t will either go out of business or consolidate with others that do.  The bottom line is that there will be fewer FHA approved mortgagees and the same amount of FHA loans.  Underwriters will be slammed and turnaround times will lengthen until the FHA approved lenders staff up appropriately.  That will take a few months (maybe into late spring).  Until then, it could be a mess which is terrible because that’s exactly when the tax credit bonanza will be under way.  Full Eagle lenders will have a distinct advantage in the first part of 2010 in this regard if their turnaround times are strong and they have systems that can gracefully absorb increases in transaction counts and loan volumes.
  • More guideline overlays – The remaining approved FHA lenders will have greater liability than they’ve had before and consequently, they’ll take steps to mitigate that risk.  The first think they’ll do is introduce underwriting guideline overlays.  Expect greater DTI constraints (perhaps 43%-48%).  Credit scores will go up.  Perhaps non-occupying co-signers will drift away as well.  Perhaps others.
  • Will there be non-mortgagee correspondent lending? – While this hasn’t been totally cleared up, it seems from early accounts that HUD will require FHA loans to be closed in the name of the approved mortgagee.  This would mean, if this remains true, that if you’re not a HUD approved lender, you can’t close correspondent.  You’d have to close the loan on a wholesale basis.  This will greatly enhance the importance of FHA approved correspondent lending, lead to further consolidation and it will put pressure on warehouse lines (if this ends up being the consensus view of the new rule).
• Credit Score Requirements – Rumored
  • HUD is planning on creating minimum credit score requirements for the first time.  Expect lenders to set their minimum scores 20 points higher than whatever HUD comes up with (or more).