FHA Gets Tough
I recently read an article in the Washington Post which described changes to the FHA mortgage insurance program which are currently being considered. Among these changes was implementing minimum credit score requirements beyond 500 which is the current minimum (and with that you must only limit your borrower to a 90% LTV) as well a possibly increasing the minimum required investment. Other changes are also being discussed which if implemented will result in an FHA mortgage insurance program that is more industry standard.
The primary reason for the changes is of course the high rate of defaults occurring where the program is concerned and with that in mind I do agree that a slight overhaul would help but I don’t think overhauling the program until it is the mirror image of FNMA and FHLMC is the answer, after all those programs already exist, we don’t want another one just like it. Additionally, to do this would eliminate the principal under which the FHA mortgage insurance program was developed and has operated under for the past 75 years, which was to provide financing options for qualified individuals deemed underserved segments of the population who were not otherwise served sufficiently by the mortgage programs available in the private sector.
In short, if we create an FHA mortgage insurance program that is the mirror image of the current available program which have been designed for well qualified moderate to upper income individuals, we will eliminate financing options for well qualified low to moderate income borrowers where purchasing affordable housing is concerned with affordable housing being the key word in this statement.
FHA began a different sort of overhaul in 2005 when the agency decided to main stream the program and make it more industry standard in order to be more competitive with main stream loan programs like Fannie and Freddie. During this time they revamped the appraisal protocol indicating appraisal requirements that were more in line with Fannie Mae standards as well as doing away with the MCAW, simplifying down payment calculations, increasing the LTV on cash out refinance transactions to 95%, introducing the streamline 203k as well as doing away with the principal of non allowable closing costs.
In short we had an industry standard program without the controls of an industry standard program because FHA had always allowed a more flexible common sense approach to underwriting, which of course also made it more vulnerable to program abuse. Not that that it made much difference during this time because the industry standard programs had pretty much done away with underwriting altogether opting for automated underwriting methods which required little or no underwriting responsibility where loan decisions were concerned. In other words just do what the software tells you to do and no you don’t need that documentation. In short the mortgage industry had gone insane and FHA revamped their program to follow suit so it only makes sense that they are begging to feel the same pains albeit somewhat delayed that the rest of the industry has been experiencing since 2007 which brings me back to the aforementioned FHA overhaul.
When FHA redesigned their mortgage program between 2005 and 2008, one of the things they did not think about was what effective an industry standard program would have on a program that was developed for and underserved segment of the population in order to promote homeownership and community revitalization. Underwriting guidelines established for this program were designed around the individual who was purchasing affordable housing which would equate today to purchase prices between say 75,000 and 200,000. Seriously, 729,000 is NOT affordable however, these gross increases in statutory loan limits place the program into main stream competition without considering the hazards of operating with underwriting guidelines designed for much smaller purchase prices and ultimately decreased risk.
Think about it, a loss at foreclosure when considering 25% REO stigma on a property worth and financed at $125,000 is about $31250.00 in comparison to a loss under the same circumstances with a loan amount of $729000.00 which would be approximately $182250.00 and that baring any decline in value which is not out of the realm of possibility when considering properties in high cost areas.
A property valued at $150000.00 is more likely to hold its value in a declining market than a property valued at $850000.00 because it is affordable. Additionally, we now have main stream borrowers utilizing the program in order to purchase property of significantly high values because they would not otherwise qualify for mortgage program that were designed for these types of purchases with underwriting guidelines appropriate to support the increased risk of such loans. The possibility for disaster is just endless and I could go on forever but I won’t
In closing I would like to say that yes I support an overhaul of the program but think it should be one that embraces the principals that the program were founded on 75 years ago which was to provide affordable housing options to low to moderate income borrower as well as other underserved segments of the population in order to promote homeownership opportunities and neighborhood revitalization and community development. What it should not do is become a mirror image of the programs that already exist for the well served segments of the population.
This would leave the individuals for which the program was developed with no options where obtaining homeownership is concerned and give well served individuals greater options than they already have. FHA should be the housing finance program that it was designed to be which was a federal housing program and not an image of private sector financing. Think about it, it was industry standard that got us into the mortgage mess not public sector financing so why continue to emulate it. As always, happy underwriting.