Underwriting standards, minimum down payments remain intact
BY KEN HARNEY, MONDAY, NOVEMBER 19, 2012.A bailout for FHA? Don't bet on it.
And what's the practical significance of the steps the agency announced last week to avoid a meltdown? What impact will they have for homebuyers and sellers who rely on FHA for affordable financing?
Less than you might think if you read some of the dire reports on Friday's news: FHA's capital reserve ratio to support its single-family and reverse mortgage programs plummeted to -1.44 percent, according to an independent audit, representing a negative economic value of more than $16 billion.
You may have also read that in response, the FHA plans to raise its annual mortgage insurance premiums from 1.25 percent to 1.35 percent early next year, and revoke new borrowers' ability to cancel their premiums once their loan balances hit the 78 percent LTV level.
The agency also is going to expand pre-purchase counseling efforts for applicants with low credit scores and minimal down payments, and step up efforts to promote short sales to seriously delinquent owners who are likely headed for foreclosure.
Taken together, the changes don't appear to be a big deal for most buyers who opt for FHA loans. In fact, you can argue that what's not being changed is far more noteworthy than what is:
- Minimum down payments will still be 3.5 percent. The agency resisted demands that it boost the minimum to 5 percent.
- There will be no risk-based pricing on premiums, another demand by critics. FHA will continue to its one-price-for-all system in which low-risk borrowers essentially subsidize the premiums of higher-risk borrowers.
- Underwriting will continue to be generous on key items like debt-to-income ratios.
Whereas Fannie's and Freddie's automated underwriting systems cut off applicants who have back-end (total debt including housing) ratios much above 45 percent, loan officers tell me FHA sometimes allows them to push through back-end DTIs in excess of 56 percent, and even front-end (housing) ratios of more than 45 percent.
None of this is changing because, in the words of Bob Ryan, a senior adviser to HUD Secretary Shaun Donovan, "we don't want to overreact" to an audit report that may have exaggerated the gravity of the agency's situation.
The audit report used house price projections that did not reflect important gains in recent months, for example, and did not take full account of revenues being generated by the agency's high-performing, low-loss recent books of insurance business.
David H. Stevens, immediate past FHA commissioner and current CEO at the Mortgage Bankers Association, told me it's doubtful FHA will need a cash infusion next September from the Treasury because "they (the leadership at FHA) have all next year to replenish the fund" with additional tweaks to premiums, increasing the pace and productivity of REO dispositions, and restructuring the ailing Home Equity Conversion (HECM) reverse mortgage program to cut losses.
Continuing increases in home prices will help out a lot, since depressed home values in the 2008 and 2009 vintages of FHA originations have plagued the agency and created the bulk of its current problems.
The decision to retain the 3.5 percent minimum down payment was especially key, said Stevens. FHA can raise or lower premiums anytime, "but once you raise the down payment (minimum), that would be difficult to chip back."
More importantly, raising minimum down payments would exclude large numbers of first-time buyers with good jobs who are solid credit risks, but simply lack the cash to make the type of down payments required in the conventional marketplace.
Turning away qualified applicants because they couldn't come up with another 1.5 percent in down payment cash would be an abandonment of FHA's traditional mission of opening the door to homeownership for moderate-income families, especially first-time purchasers and minorities.
In some local markets, FHA finances well over half of all purchase loans. In the first three months of 2012, it held around a 32 percent market share of new purchase loans nationwide.
Another step FHA didn't announce last week but soon will: reining in seller concessions to buyers to help pay for closing costs and lender fees.
Seller concessions, like the now-prohibited seller-funded down payment assistance programs that were commonplace in 2004-2008, can distort transactions by cutting buyers' initial stakes in the property to zero or even negative equity, and have been linked to losses to the insurance fund.
Though FHA has proposed a tiered system that would lower maximum contributions for many sellers to 3 or 4 percent and restrict the current 6 percent maximum to low-balance loans, it has not yet published a final rule.
When I asked FHA Commissioner Carol Galante on Friday for an estimate on the timing of the final rule, she rolled her eyes, lamented the frustrations of jumping through the bureaucratic hoops required to get a new federal regulation onto the street, and said "soon."
This month? "No." December? "I hope so." But even when finalized, the rules will almost certainly give real estate brokers and lenders time to adjust.
So bottom line: 6 percent seller concessions are likely to be available for purchasers into the early first quarter of 2013. After that, they're history.
Ken Harney writes an award-winning, nationally syndicated column, "The Nation's Housing," and is the author of two books on real estate and mortgage finance.