There is alot of change happening in the mortgage industry. FHA is tightening up some of the loan requirements and this is going to make a big differance in the ability of buyers to qualify for basic mortgages. I think the pendulum has swung too far in the opposite direction now.
Here is an article from Lorna Campbell at Franklin American Mortgage Company:
There are major changes coming to the FHA program that we expect will be implemented in 2010, starting later this month. Dave Stevens, FHA Commissioner and his team have been reviewing FHA’s performance data and operations for several months and we believe there will be dramatic changes to the FHA program and policies.
Over the next several months, we expect policy changes to at least five major areas in the FHA program.
I. Major Changes to FHA Underwriting & FHA Program.
A. Improve FHA loan quality
* Increase “upfront cash that a borrower has to bring to the table”
* Two options
1) eliminating the ability to finance the upfront premium
2) raising the cash investment requirement above 3.5%
a) Reduce seller concessions (from 6% to as low as 3%)
b) Raise minimum FICO score
c) They could impose an LTV maximum by FICO score, borrowers w/higher FICO scores could have higher LTVs)
B. Increase MIP
a) Up-front premiums can be raised up to 3%
b) An increase to about 2 - 2.25% is more likely
c) FHA could also establish higher premiums for specific products (e.g. refinance
transactions)
We expect these changes to be announced later this month and could be implemented as early as a couple of months.
II. FHA Budget Proposals
The President will announce in his State of the Union speech in late January-early February, several legislative initiatives as part of the Administration’s Fiscal Year 2011 budget. The things that we expect to see are as follows:
1) Increase the current cap for annual premiums (currently .55%)
2) Get legislative changes to Credit Watch to facilitate the suspension of an FHA Lender’s entire operation not just individual branches
3) Accountability increased for FHA Lenders for fraud or misrepresentation.
We expect these changes to take place within the next several months to enact and then more months to implement.
III. Credit Watch Expansion
Although FHA appears to be ready to implement Credit Watch for underwriting lenders FHA will be comparing Direct Endorsement lender’s early default performance for loans underwritten to HUD similar to what FHA has done for retail branches. FHA could compare a lender’s performance on all loans underwritten (including retail) or loans underwritten for third parties (ie. mortgage brokers or principals) to the field office average.
This will probably be announced within the first quarter.
IV. FHA Lender Eligibility Changes
FHA proposed a rule on lender eligibility changes in late November - December. The rule would raise net worth requirements for FHA approved lenders and eliminate the loan correspondent approval and renewal process. This means that FHA approved mortgagee’s would be permitted to accept a loan from any source if the originating entity met State laws and federal regulatory requirements (eg. RESPA).
Three main parts to the rule:
1. Elimination Of Loan Correspondent Approval Process
Currently FHA has about 8,000 brokers currently in the FHA system. There will be no approval of new correspondents and no renewals of existing correspondents. This means no grandfathering in existing correspondents into the FHA process. This program will be stopped entirely. Only FHA approved mortgagees will be able to request FHA case numbers and the loan would have to close in the FHA approved lenders name.
Of course this has sparked many comments from Brokers to HUD for HUD to establish a Broker approval standard. Of course we don’t know at this point if this will happen.
2. Increased Net Worth Requirements
The proposed rule will increase the net worth requirements from $250,000 to $2.5 million over a three year period. All participating mortgagees would be required to have a net worth of $1 million, of which 20% must be liquid assets within one year of the final rule and will have to be maintained.
3. Codification of rules in Mortgagee Letter 2009-31
Implementing changes to the lender eligibility criteria in the “Helping Families Save Their Home Act”.
We believe that HUD will act quickly on finalizing this rule because of the number of renewals for approximately 8,000 brokers currently in the FHA system waiting to be processed.
V. Risk Management Improvements
Risk Management improvements has to do with the early payment defaults that have to be reviewed on loans that result in claims for the first couple of years. It’s a possibility that “poor performing” lenders will be more prominently displayed on their website and in press releases.
Conclusion
According to the statements that FHA Commissioner Dave Stevens has outlined above FHA will be transformed over the next few years.
