In today’s press release from HUD, “FHA ANNOUNCES POLICY CHANGES TO ADDRESS RISK AND STRENGTHEN FINANCES,” FHA policy changes, additional desired changes and reasoning for the changes are announced in detail. The material changes are already becoming well known but the potential changes along with alternative approaches to FHA solvency are what we should really be paying attention to.
Briefly, here are the material changes that HUD will make within its existing authority:
1. The first step will be to raise the up-front MIP by 50 bps to 2.25%. (how this increase will be applied will be covered in a mortgagee letter to be released tomorrow and this will be put into effect in “spring”)
2. New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%. (the only part of this that is interesting is that this marks the first time FHA guidelines have been concerned with FICO scores – in a way, that’s too bad since FICO’s are generally overemphasized and capacity to repay is under emphasized – either way, it hardly matters since most lenders have underwriting guideline overlays requiring credit scores of 620 or more – effective date would be in “summer” after a procedural and meaningless comment period)
3. There will be a reduction of allowable seller concessions from 6% to 3%. (MORE ON THIS BELOW)
4. Neighborhood Watch data - Will be available in a more user friendly format on the HUD website on February 1. (this is great because it allows consumers and Realtors to vet loan officers and lenders)
5. HUD will implement Credit Watch termination through lender underwriting ID in addition to originating ID. (we’ll have to pay close attention to what’s actually new in the forthcoming mortgage letter due tomorrow vs. what is closer to reiteration with a promise to enforce existing policy – either way, this will weed out lenders that write loans that default at a higher rate and is a great thing)
Of these, number 3 will have the greatest consequence on home ownership (particularly for lower income home purchasers). HUD provides this explanation for this change:
“The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.”
If the concern is to see that appraisals are unbiased and of high quality, FHA has already addressed this in Mortgagee Letters 09-28 and 09-36 (to name a few). HUD hasn’t even let these changes play out to prove their effectiveness and their already cutting seller concessions in an effort to regulate appraisals. This amounts to killing a fly with a bazooka. As for FHA being in “conformity with industry standards on seller concessions,” it’s not HUD’s place to conform to industry standards. In April 6th of 2006, former Assistant Secretary of Housing Brian Montgomery characterized HUD’s purpose this way:
“FHA was created in 1934 to serve as an innovator in the mortgage market, to meet the needs of citizens otherwise underserved by the private sector, to stabilize local and regional housing markets, and to support the national economy.”
Conforming to industry standards with respect to seller concessions is not innovative, doesn’t meet the needs of citizens underserved by the private sector (since there practically isn’t one), will have a destabilizing influence on the local and regional markets and won’t support that national economy.
Here’s the deal folks, . . . . This change will be posted in the Federal Register in February. When it is, it will be open for comment and it is incumbent up on any real estate professional who has concern for home ownership rates (particularly for lower income families), that they voice their opinion on this matter. Rest assured, I’ll be posting the link with instructions on how and when to make these comments.
Another matter in need of action will be opposition to HUD’s pending “request for legislative authority to increase the maximum annual MIP that the FHA can charge.” I’m not suggesting that this isn’t the right solution but where’s the conversation? Is increasing the monthly MIP really cheaper for the consumer than financing it into the loan? What’s the average lifespan of a FHA loan? What will the impacts of higher monthly payments be on housing prices? Should HUD be taking steps that would make it less competitive with the private insurance market (keeping in mind the long view that someday the private market will become vigorous again)? It may be an unpalatable conversation to have but maybe FHA needs to get in line for TARP funds to cure its temporary capital base concerns instead of taking short sighted structural steps that could have adverse long term competitive consequences (maybe even an old fashioned congressional appropriation). FHA may be afraid to be compared to Fannie Mae and Freddie Mac but that fear shouldn’t stand in the way of rational solutions. Call your legislators and ask them for this conversation rather than a mandate for legislative authority.
I’d like to conclude by saying that, with a few exceptions, most of these changes are for the best and that we’re fortunate to be hearing about them with as much notice as we’ve been given. I just hope that the professionals in this industry rally around well thought out solutions to FHA solvency rather than quick fixes.
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