FHA Mortgage Insurance Fund Down 40%

Mortgage Law Central reports today on FHA’s Oversight Capability. 

The House Committee on Financial Services held a hearing to look into the recent Business Week story alleging that predatory lenders are alive and well originating FHA loans. The committee listened to testimony from HUD on the approval process for FHA lenders, compliance with FHA regulations, and the level of reserves in the FHA Mortgage Insurance Fund:

“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,

28 thoughts on “FHA Mortgage Insurance Fund Down 40%

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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?

  6. 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?

  7. 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.

  8. 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.

  9. 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.

  10. 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.

  11. 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.

  12. Pingback: To the Students from the April 15, 2009 Current Issues/FHA Class at Veridian Cove : ceforward.com

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