FHA Mortgage Insurance Fund Down 40%
Jillayne Schlicke on 01 14, 2009
Mortgage Law Central reports today on FHA’s Oversight Capability.
“Rep. Stephen Lynch, D-Mass., voiced his concern that FHA’s Mutual Mortgage Insurance Fund levels were decreasing and might go under the required two percent threshold. He said the latest data forecast, from June 2008, was done before the meltdown and he believed that the funds could dip below the 2 percent threshold. Heist also had these concerns, stating that the results from the Office of the Inspector General’s (OIG’s ) latest actuarial study show that HUD has sustained significant losses in its Single-Family program, reducing the program’s reserves. He said that as of Sept. 30, 2008, the fund’s economic value was an estimated $12.9 billion. This is an almost 40 percent decrease from over $21 billion the year before. “The current $12.9 billion economic value represents 3 percent of the mortgages insured by the FHA,” Heist said. “Although about the 2 percent ratio required by law, it is well below the 6.4 percent ratio from the same time last year. Moreover, these projections used macroeconomic forecast data as of June 2008 and are profoundly sensitive to the accuracy of those forecasts.” He said that if more pessimistic assumptions were factored in, the ratio could dip below 2 percent in coming years, requiring an increase in premiums or Congressional appropriation interventions to make up for the shortfall. Even though Murray said the ratio has been exceeded by the department every year since its establishment, he could not tell the committee that the fund would not get close to the 2 percent threshold.”
Let’s not act surprised when FHA lending standards are raised and the mortgage insurance premiums go higher. With FHA, homeowners need only a 3.5% downpayment and all of that can be a gift from a blood relative. As housing prices continue their slow decline, FHA borrowers with negative equity will grow, leading to a potential for higher losses.
This next part scares me more than the movie The Unborn did last Friday night. Maybe we should lobby congress to appropriate some of Obama’s stimulous money to pay for IT workers to help FHA:
“HUD has been vocal in recent years about its needs for FHA, particularly in the area of information technology systems,” Murray said. “FHA data is stored on 35 separate legacy systems, which have been obsolete for nearly two decades.”
The National Association of Mortgage Brokers, who we can always count on for entertainment, sent a representative “to reassured the committee that the problems that occurred in the subprime market would not likely happen in the FHA-insured market.” I question NAMB’s ability to make this reassurance:
“There are some significant differences between subprime and FHA originated loans,” he said. “Borrowers that utilize the FHA program have to adhere to higher standards than they would in the subprime market, have down payments and are expected to meet strict loan-to-value ratios,” he said.
Acceptable FHA loan to value ratios are 31/43. Here’s what this means: We arrive at the first number by dividing the mortgage payment (principal, interest, taxes, insurance) into the borrower’s gross monthly income. The second ratio is the borrower’s total montly revolving debt including, child support and the mortgage payment, divided by gross monthly income. What’s not included are ongoing bills for utilities, cell phone, gas, and daycare. I wouldn’t necessarily call 31/43 strict. In fact, FHA has the most liberal ratios available today. Borrowers do not have to have perfect credit to receive an FHA loan. In fact, FHA will take borrowers with no credit score at all. Now lenders might decide to go more strict than FHA on credit score requirements and lenders might even decide to charge a higher interest rate for riskier FHA borrowers, but this is lender driven, not FHA. FHA is not a lender. It doesn’t set interest rates. It’s an insurance program.
Is a 3.5% downpayment strict? With falling home values, I don’t think it’s enough. Maybe I’m just a super meany meanster. It’s not that FHA’s standards are higher, it’s that the standards for subprime, Alt-A AND prime collapsed during the predatory lending bubble run-up days. I assert that FHA’s standards are wise but not strict: Documenting a two year history of income, lending to people who have demonstrated the ability and a willinginess to repay loans, verifying where the cash to close came from (gift or loan?) and fully reviewing the collateral. If only our regulators would be this strict when loaning money to banks, AIG, and otther black holes but that’s a different story.
In fact, any of us could argue that subprime borrowers should have had HIGHER standards than FHA’s, not lower. But that was yesterday’s news. We could easily make an argument for increasing standards for today’s FHA borrowers.
Notice how NAMB makes no mention of any stricter requirements on the loan originators. That’s because the requirements, in some cases, are actually WEAKER than requirements for a mortgage broker.
Many consumer loan companies are approved to originate FHA loans, and many of the state laws recently passed address loan originators who work at a mortgage brokerage, not a consumer loan company. In Washington state, at this time there are no licensing requirements, background checks, competency tests, or any required continuing education for loan originators who work at a consumer loan company.
This will gradually change with the implementation of the National SAFE Mortgage Licensing Act.
As we continue to push everyone who doesn’t qualify for a conforming loan to FHA, the industry must be ready to support changes that will keep the FHA Mortgage Insurance Fund healthy and that will bolster compliance and minimize defaults. This is like walking a tightrope trying to balance the need for first time homebuyer mortgage money (along with former subprime refinancing homeowners) with making lending decisions that won’t put that homebuyer and FHA in a worse-off position down the road.
About the Author: Jillayne Schlicke
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14 Responses to “FHA Mortgage Insurance Fund Down 40%”
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I think you’ll have problems with defaults as long as they’re using credit scores to determine loan approvals. Wrong tool for the job when it comes to mortgage lending. Credit scores reward financial irresponsibility, and punish financial responsibility, because they’re a tool designed to allow companies to decide whether a credit card account is likely to be profitable.
Use the right tool and a zero percent down loan program would have better results than a 10% down program.
Uh… I thought FHA didn’t use credit scores, Kary?
I don’t know because I don’t get involved in the nuts and bolts of loan approvals, but Rhonda’s periodic rate quote posts indicate FHA pricing is based on a credit score of 620 or better.
Kary, I use 620 or better for FHA rate quotes because there is no price hit with scores 620 or higher. A borrower w/a 620 score has the same rate as the borrower with a 740 or better score. There are price hits at 600-620 (0.25% to fee) and under 599-580 (1.00 to fee) with FHA.
Biliruben is correct. FHA relies on credit history. You can have a 580 score and get an FHA loan–as long as your credit’s been clean for the last 12 months…however, it’s going to be expensive.
Hi biliruben and Kary,
Today, FHA has loan originators send the file through FHA’s “TOTAL Scorecard System” which looks at the following five factors.
FICO Score
Monthly Housing Expense Ratio
Number of Montly Payments in Reserve
Loan to Value Ratio
Loan Term
FHA considers these to be the highest risk factors.
Let’s analyze these one at a time starting at the bottom. Most everyone has a 30 year fixed. LTV: Most FHA borrowers purchasing a home are at the maximum LTV and many have zero cash reserves left after closing.
It’s interesting that FHA doesn’t look at the total debt to income ratio. With all the news over the last two years about credit score fraud, personally I think they should completely do away with it and manually underwrite everything again, but I’m partial to manual underwriting. It does take more time.
As we now know from the hearings, FHA’s systems are 20 years of out date. I’m wondering why they don’t just revert to manual underwriting at this point.
If you end up getting a low “score” through FHA’s TOTAL system, then the file is referred to a human underwriter (manual underwriting.)
There are a few things I would take a closer look at as an FHA underwriter: Has the originator provided verifiable, stable monthly income AND ALSO payment shock, which Rhonda has mentioned several times:
If this is a purchase transaction, what was the homebuyer’s monthly rent payment and how higher is their mortgage payment?
FHA (human) underwriters also fully underwrite the FHA appraisal before the file is approved.
Okay, so you’re both saying FICO score is taken into account to some extent.
What I’m saying is that’s stupid. Someone with a fully paid for house and car, no credit cards and $1,000,000 in the bank would probably have a low FICO score. Someone with an overencumbered house loan, two car loans that are one year old, and $30,000 of credit card debt that they’ve been swimming with for a year could probably have a very high FICO score. Which would you rather make a home loan to?
Jillayne, I seem to remember you commenting on this months ago. Something to the effect of “Lets not act surprised when FHA starts to have trouble”
Are you psychic?
Kary, Someone who is overencumbered in debt probably would not have a high credit score…unless they have low balances on their debts (30% or below of the available credit lines). Once you’ve utilized over 30% of available credit, you’re dinged and hit harder once you use 50% or more of your available credit.
Two car loans that are one year old will not help your credit at all. Even if you put 50% down on the car, what’s looked at is the original loan balance to the current balance.
Your scenario is not accurate.
By over-encumbered I meant owning a property worth $300,000 that they owe $350,000 on. I wasn’t referring to credit card debt. Being over-encumbered they have fewer options for dealing with the debt than someone with equity.
As to the car loan–which is worse? Having two car loans that are both over a year old, or having no credit at all? My understanding was that no credit was worse. Also, my understanding was that if you took one of those two cars and traded it in, to get lower payments and/or a lower balance, that the new loan would ding your credit score more than the old one, where for purposes of a mortgage loan, a debtor making such a move would be a good thing, not a bad thing.
Kary, car loans will ding your credit when they’re new–doesn’t matter what the payment is and credit scoring of your mortgage does not factor the property value. It’s simply how much is owed compared to the original debt and/or credit line.
What’s ideal is 4 tradelines that are at least 24 months old with less than 30% of the available balance of the credit line used.
I assume by “ideal” you mean ideal for a good credit score. Ideal for making a home loan would be 4 tradelines of any age, on which nothing but current charges are owing, and no defaults of record in the past 7 years.
But that brings up another absurdity of the credit score system. Owing $10,000 on one credit card is worse than owing $2,500 on four, assuming in both cases the debtor has four credit cards and the credit limit on each is $11,000. That’s nuts, and should not even be a distinction when it comes to making a mortgage loan.
Kary
you’re wrong about credit…but we should probably move this to another post that’s actually on credit. We’re hijacking this one from it’s original content. I’ll find one that will be more suitable to carry on the conversation.The Business Week article about a host of one-time subprime lenders moving over to do FHA is scary. Evidently the FHA approval process is rather weak and they can get in without thorough background checks. Let’s hope they can weed out any bad apples that were approved.
[...] Here is the March report I promised to find on FHA delinquencies. The FHA Home Mortgage Insurance Fund is down by 40% according to a January report. [...]