by Dan Krell © 2009
After almost being absent in the local real estate market, the FHA (Federal Housing Administration) mortgage is now the mortgage of choice. Due to the almost eradication of “Alt-A” and sub-prime mortgages from the marketplace, home buyers who have little money for down payment and need flexible underwriting have once again turned to FHA. FHA is not only assisting home buyers, but financially challenged home owners are also being assisted through FHA refinance programs. The FHA mortgage has once again become the workhorse of the mortgage industry
The cycle of home buyer’s usage of FHA mortgages makes sense if you look at the explosive availability of “Alt-A” and subprime mortgages (which had lower credit and/or documentation requirements) earlier this decade. The increased usage of these mortgages reduced home buyers’ reliance on FHA to make their purchases. This home buyer behavior is supported by a study that determined a home buyer’s “mortgage debt decision” (between a conventional mortgage and a FHA mortgage) is dependent on their down payment, amount of the monthly mortgage payment, and mortgage insurance payments (Hendershott, LaFayette, and Haurin; 1997; Journal of Urban Economics, 41:2, 202-217).
With the decline of “Alt-A” and sub-prime lending, the number of FHA mortgages originated has recently increased significantly. Nick Timiraos and Deborah Solomon reported (The Wall Street Journal, “Loan Losses Spark Concern Over FHA,” September 4, 2009) that as of the 2nd quarter of this year, FHA’s “market share” increased to 23% as compared to 2.7% in 2006. As the number of FHA mortgages increased, so has the number of defaults; Timiraos and Soloman quoted the Mortgage Bankers Association statistics of 7.8% of FHA mortgages in the 2nd quarter were 90 or more days late or in the foreclosure processes (up from 5.4% a year ago).
As FHA’s risk exposure increases, so does concern over FHA’s capital reserves. In a September 18th press release (HUD.gov/news), FHA Commissioner David H. Stevens announced that FHA will take measures to reduce risk in response to the anticipated result of FHA’s annual actuarial study that may indicate that FHA’s capital reserve is below the congressionally mandated 2%. Although Commissioner Stevens stated,” …the fund’s reserves are sufficient to cover our future losses…the FHA will not require taxpayer assistance or new Congressional action,” he made it clear that “…credit policy and risk management changes are important steps in strengthening the FHA fund, by ensuring that lenders have the proper and sufficient protections.”
In addition to the announcement of adding a Chief Risk Officer, Commissioner Stevens announced changes to credit requirements, appraisal requirements, and streamline refinance procedures. Credit requirements on mortgagees (lenders) will change to ensure that lenders are properly capitalized; changes include increased lender net worth from $250,000 to $1M, and submit audited financial statements from supervised mortgagees.
FHA will adopt language from the Home Valuation Code of Conduct (HVCC), already adopted by Fannie Mae and Freddie Mac, which requires appraiser independence. Due to the volatility of the housing market, the FHA appraisal validity period will be decreased to four months from six months.
To tighten standards on FHA streamline refinancing, new procedures will focus on mortgage seasoning, borrowers’ payment history, collection of credit score, and a stated benefit to the borrower. Additionally, the loan amount will be limited to 125% of the value of the home.
This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 21, 2009. Copyright © 2009 Dan Krell