Widening the Gap for Underserved Communities

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

I am going to try to be as nice as possible this week with regard to how I feel about the new changes implemented by the Federal Housing Administration but I am not entirely sure if it will work out. For those of you who have read my blogs in the past I am sure you understand how dear the FHA mortgage insurance program is to me. I have been handling FHA insured mortgages for over 20 years and have had my DE for almost as long, I have always had a tremendous amount of respect for the agency as well as the core values that it embodies.

In the past I have always regarded my designation as a direct endorsement underwriter as somewhat of a responsibility to the American people. It was a way to help the low to moderate income populations to achieve the dream of homeownership not to mention a whole slew of other things like neighborhood stabilization and revitalization as well as community reinvestment. In short, having the ability to help create homeownership opportunities for the average American has been rewarding.

As the mortgage industry is well aware by now, the Federal Housing Administration has begun implementing more changes to the program, as they put it more industry standard stuff, which will further alter not only how we underwrite the program but quite frankly what segments of the population will benefit. The press release, that being HUD no. 10-016 as it appeared on HUD’s website outlined what we as industry professionals could expect and nicely summed up with Commissioner Stevens saying, “FHA will remain the largest source of home purchase financing for underserved communities.”

Seriously, I don’t think so. Some of the changes will not have much of an impact on underserved communities, those typically being low to moderate income borrowers as well as certain minority groups, however, other of the changes will have a huge impact and stand only to widen the gap between underserved communities and other populations who’s financing needs have been historically met through other financing venues such as conventional loan products. In other words moderate to upper income borrowers will continue to have their financing needs met but the individuals for whom the program was established will have their access to affordable financing options eliminated.

I read an article this morning which I found on MSN regarding the higher cost of FHA financing, this being FHA’s recent announcement that beginning with case numbers ordered on or after April 5, 2010, the UFMIP will be increased to 2.25% as stated in ML 2010-02. Within this article, Commissioner Stevens was also quoted as saying, “Not everybody should own a home”. I will agree that there are certain instances in which individuals are not prepared for the responsibility of homeownership but I strongly disagree with his statement that not everyone should own a home. As far as I was aware, FHA’s core values included promoting homeownership you know the whole sustainable affordable housing for populations who were considered underserved by other financing options.

Wow what a change in principal and quite frankly by reducing allowable seller contribution particularly in the low to moderate income community, it eminent that both those who should and those who shouldn’t own homes won’t.

By the way, this move will also go a long way to devastate neighborhood stabilization, particularly in lower income neighborhoods as individuals will no longer be able to come up with the necessary funds for closing and be forced to rent. Now it will benefit investors who can go into these neighborhoods and purchase these properties for pennies on the dollar and rent them to low to moderate income individuals but I do believe that neighborhoods with a larger concentration of owner occupied properties fair better in terms of long term stabilization than those with a high concentration of investment properties.

Ok so let’s move on to the root of the problem which based on everything I have read in the past couple days seems to be higher exposure to risk due to increased volume where total FHA originations are concerned and unscrupulous lending practices. I would like to remind everyone where FHA was in 2005. In 2005, FHA made several changes to the program including increasing maximum LTV’s to 95% on cash out refinance’s (very risky), doing away with non-allowable closing costs, revamping their valuation piece to allow a more liberal approach to repair items where a subject property was concerned as well as other things which in their opinion was more in line with “industry standard”.

Most of these changes were made so that property sellers would be more inclined to accept FHA purchase contracts, you know because the program itself provided a more affordable financing option for underserved communities then say sub prime, broker and lenders would be more inclined to utilized the program which in the past had be termed somewhat stringent where property appraisal and underwriting aspects were concerned, the whole documentation thing.

A further consideration was FHA’s implementation of FHA Total Scorecard which is an automated underwriting model which exists with Desktop Underwriter and Loan Prospector which allowed lenders to begin utilizing automated underwriting practices for the program and also allowed them to utilize documentation waivers as suggested by the AUS. In short, the AUS would allow for lenders to collect less documentation and ultimately excuse their responsibility where sound underwriting practices were concerned.

More often than not, documentation waivers would include eliminating the need for credit explanations, verification’s of rent, allowing leaner documentation where income was concerned and the like which lenders embraced. In short lenders could now underwrite files with significantly less documentation and were not on the hook for the underwriting decisions because “Total approved the loan”. By the way, FHA made the practices of utilizing total scorecard on all cases mandatory in 2008 under mortgagee letter 2008-23 and to this day, Total Scorecard is still approving 52% back end DTI’s on some cases (like that’s not risky).

It is just my opinion that if an underwriter or lender does not need to accept the responsibility for the underwriting decision they have made then they will approve every loan they can because these types of practices encourage them to do so. Take it step further, when guidelines by an agency are implemented such as a max LTV on a cash out refinance of 95% in a declining market lenders will absolutely take it and run with it so blame lenders for following guidelines. It has only been within the last 12 months that FHA has mandated that Due Diligence in underwriting must take precedence over AUS that underwriters are now responsible for the loan decisions that they make regardless of Total Scorecard findings which I think is an excellent idea but should have been standard practice all along.

In conclusion I would like to say that several factors contributed to the current position of FHA above and beyond the overall lack of responsibility in underwriting. FHA took a program that historically was designed for the low to moderate income borrower and modified it mirror that of FNMA and FHLMC (conventional loan programs) which eliminated several controls which had been in place to manage the type of business FHA historically insured. Combine this with the significant increase in loan limits (in some cases to 729,000+) and the lack of control that has plagued the industry since the 1990’s and FHA’s desire to imitate this it is no wonder the agency is in the position it is in now.

Unfortunately, some of the new policies they are implementing in order to regain control will harm the very population the program was designed for, the low to moderate income borrower. As they move forward with their industry standard changes, the program will begin to mirror a conventional program which the underserved communities cannot qualify for leaving little or no options for homeownership for those borrowers. In short we will have several options for moderate to upper income borrowers and no options for the individuals this program was designed for. If FHA wants would like to improve their position, they need to stop modifying the program in order to get a larger piece of the pie and re implement the policy and procedure that has been in place for the past 60 years and give the program back to the population it was designed for.

This county does not need more industry standard programs, that is what got us into this mess in the first place. What we need is a mortgage program that is not only viable but useful for the population that is not well served by the existing programs. If FHA would lower the statutory loan limits, demand manual underwriting for all cases, do away with documentation waivers and demand underwriter accountability, the program would not only useful but also profitable for the federal government. Additionally, it would provide an affordable financing option for low to moderate income borrower’s who are interested on obtaining sustainable affordable housing. Now isn’t that an interesting concept! Happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)