For the next 30 days, HUD is seeking public comment on the following policy changes, each of which are designed to mitigate risk to the Mutual Mortgage Insurance Fund while promoting sustainable homeownership for FHA borrowers:

1) Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.

2) Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to three percent will bring FHA into conformity with industry standards.

3) Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.

All of the above is a quote from the HUD.Gov site linked in the first sentence. Anyone who understands what these new measures will or will not do for the public at large should take a few moments to respond to the Government’s request for “public comment”. I know I will. This is a topic that not many fully understand, so it is very important for those who do to respond from the standpoint of “public good” vs self-interest.

The other day, I received an email from someone who wanted to verify some surprising things he had heard about the “old days” of mortgage underwriting.   Before I go on any further about the details of the discussion, I feel the need to to give a “Surgeon Generals” type warning:  in no way do I nor Mortgage Master condone the outdated underwriting guidelines used in the “old days”.   It is interesting to see how much lending practices have changed over the years…for the better.

From Curious George:

“Heard some interesting historical information from a long time veteran of the real estate industry today.  I seems that at one time, for a woman’s income to be considered when she and her husband were purchasing a home, she needed a note from her doctor stating that she either had a hysterectomy or was going through menopause.  Apparently the fear was that if she became pregnant and couldn’t work for some time, they would not be able to pay their mortgage.  Then with the development and legalization of the birth control pill, the banks reconsidered and allowed 50% of her income to be used.   Eventually banks agreed to 100% of a womans income to be used.

Seriously though, I thought this was interesting.   Maybe you can confirm this.   It would be interesting to see how all of that affected home prices.  I’ll bet with people being to qualify for larger loans, prices got driven up.”

I’ve been trying to find information about this on-line and although I can find plenty about racial discrimination, I’m having a challenging time digging up on how women’s incomes were considered “back in the day”.   HUD and FHA’s websites glorify how their part in rescuring the American Dream during the Great Depression…I’m hard pressed to find early underwriting guidelines.

I decided to use my walking encyclopedia of all things mortgage to check the facts of this “almost unbelievable” depiction of lending history:  my 85 year old father-in-law who spent sixty years in local real estate, Bob Porter.   The first six years (fresh out of the Navy in 1945) selling real estate in North Seattle for Mutual Realty, Broadmor Realty and McPhersons while attending Seattle College (now named Seattle University).  The next twenty-two years were spent as a broker/owner of Southend Brokers with several branches in King County.  His resume continued as President of Pacific West Mortgage headquartered out of Burien and most recently as Chairman of Mortgage Master in Kent until his retirement in 2005.  Now that you know some of Bob’s background, here’s his response to “Curious George”:

“That’s right.  The industry led by FHA and VA would consider a wife’s income for short term debt such as car payments.  Professional women, teachers, lawyers, doctors and business owners income could qualify for mortgage payments on a case by case basis without a letter from their doctor.  Taking loan applications took a lot of diplomacy.  We would be sued for discrimination if we asked a woman for a doctors letter today.”

It’s hard to believe that underwriting guidelines were impacted by various forms of birth control and the progression of women’s rights.

Yesterday at The Mortgage Porter, I wrote about changes that HUD had confirmed via a press release for FHA insured loans.   Seasoned mortgage professionals know that the HUD lady hasn’t sang until a Mortgagee Letter is issued and this morning, HUD did just that with ML 2010-02.

Effective on FHA insured loans with case numbers assigned April 5, 2010 or later, the upfront mortgage insurance premium will increase.  Typically the FHA upfront mortgage insurance premium is financed, however it can be paid as a closing cost  (which is how the 2010 GFE discloses the premium). 

FHA insured mortgages for purchases and non-streamline refinances will increase from 1.75% of the base loan amount to 2.25% and streamlined FHA refinances (refinancing an FHA underlying mortgage) will increase from 1.5% to 2.25%.

According this Mortgagee Letter, HUD states that the “annual premiums will not change at this time“.   The annual premiums are what consumers pay in the monthly mortgage payment…and I do believe we will see risk based pricing utilizing credit scores impact FHA’s monthly (annual) mortgage insurance premiums in just a matter of time.

According to HUD’s Press Release yesterday, the following changes should take place with FHA insured loans in early summer:

• Seller contributions towards allowable closing costs reduced from 6% to 3%.
• Increasing the down payment requirements for lower credit scores (risk based underwriting).   The Press Release states that those with a 580 score would need a minimum of 10% down payment.   Lenders all ready have underwriting “overlays” which will not permit this scenario so this “toughening” of the guidelines is a bit lost…unless things are loosey goosey again this summer (I’ll eat two shoes).  

HUD’s press release also stated they will “implement a series of significant measures aimed at increasing lender enforcement”.

The upfront mortgage insurance premium increase will go into effect just 25 days before a home buyer needs to be “in contract” to qualify for the home buyer tax credit.