My “Jim Casey” take on the FHA’s Policy to Address Risk and Strengthen Finances

“Before I knowed it, I was sayin’ out loud, ‘The hell with it! There ain’t no sin and there ain’t no virtue. There’s just stuff people do. It’s all part of the same thing.” – (Preacher) Jim Casey / Grapes of Wrath

Here’s my take on the FHA 1/20/10 press release and the 1/21/10 Mortgagee letter as posted on my blog on January 21st, 2010:

FHA ANNOUNCES POLICY CHANGES TO ADDRESS RISK AND STRENGTHEN FINANCES

PRESS RELEASE: January 20th, 2010 – Deciphered into (highly biased and subjective) English by me on January 21st, 2010.

I basically cut out a lot of the stuff that doesn’t matter and tried to just talk about what will affect you. If you really want to torture yourself, here’s the original release.

The FHA statement in italics – My translation looks like this…easy to read. Ready? Cool, let’s get down to business then….

New Measures Will Help FHA Better Manage Risk, While Maintaining Support for the Housing Market and Access for Underserved Communities

FHA is hemorrhaging cash due to fraud, rapidly rising defaults and basically because the sleazy sub-prime guys ran around announcing that FHA was the “New Subprime” when everything collapsed in 2007 after Wall St. decided to take the stance that it wasn’t a good idea to allow brokers, lenders and loan officers to give away loans to people that couldn’t afford the payments (even though they started the whole damn thing in the first place).

Who would have though that would come back to haunt them huh? (file this under “ya think?”)

WASHINGTON – Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation’s housing market recovery.

Ok, blah, blah, blah…We’re making changes to FHA to make it more expensive to get an FHA loan so that less people will use FHA loans. IF you do still use an FHA loan (because we know it’s the only game in town with a low down payment) we get to collect more of your money so that we can pay for all of the fraud we’ve allowed in the past.

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.

The credit score thing…no biggie. They basically said that if you have less than a 580 credit score, you must put down at least 10% down payment before FHA will insure the loan.

Real quick though – FHA does NOT lend money. They only insure against the event of default. Lenders stopped allowing loans to borrowers under 620 like a year ago….Good one guys, couldn’t ya be a little more relevant maybe? Maybe even just pretend like you know what the rest of us are dealing with?

The rest of this talks about very real changes that will affect your ability to use FHA financing in the future. I’m going to wait until they go into specific detail to give you my two cents though….let us continue, shall we?

• Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending

• The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
• If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
• This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
• The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.

FHA will increase the Mortgage Insurance Premium (MIP) by .50% of the loan amount. The current mortgage insurance requirements is 1.75% upfront – which can be financed into the loan, and .50% of the loan amount which is paid monthly.

The rest of the bullet points basically say that they will petition congress to split up the mortgage insurance premium between the Upfront and the Monthly. If I had to choose a middle ground on this I’m thinking 2% upfront and .75% monthly, but the Mortgagee letter that they released today says otherwise – it will be an upfront cost.

HUD Mortgagee Letter 2010-02 –

I still wouldn’t rule out the FHA trying to split it up the .50% increase between the upfront MIP and the monthly MI….let’s see.

• Reduce allowable seller concessions from 6% to 3%

The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.

This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

Ok, so the long touted benefit of FHA loans has been that the Seller can contribute up to 6% of the sales price to the Buyer in the purchase transaction to be used toward the closing costs or interest rate buy down.

Reducing this from 6% to 3% “to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.” is an interesting statement since this “industry standard” is the standard set by Fannie Mae and Freddie Mac when they were only Government Sponsored Entities (GSEs) and not under a Federal Government Conservatorship.

Now, there’s an interesting take on this part that may actually not be so bad for the consumer. There has been talk of adopting the Fannie Mae HVCC policy which prevents lenders from communicating with home appraisers. This has been a huge headache for home buyers for more reasons that what I can go into now.

It’s possible that if FHA saves the world by reducing the incentive for evil real estate people to bloat the sales price to finance the closing costs by reducing the allowable seller concessions, that we may be able to avoid the move to adopt this failed conventional lending policy being adopted by HUD. Let’s hope.

If you are really interested in how HVCC has affected Home Mortgage Lending – first, read the rest of this article, then come back and check out this Google search I did for “The problem with HVCC”

There’s more to this PRESS RELEASE, but it’s all sort of government jargon and hyperbole justifying the bold moves they’ve taken to insure that FHA financing is available as a source of affordable housing financing for families for years to come…eh, I have to resist the urge to be sarcastic here….so I’ll just say….Good job protecting us from ourselves. Couldn’t have done it without ya!

There are also some VERY STRONG words about coming down hard on fraud and deceptive lending practices….I really don’t have the energy to launch into a rant about my opinion of this….maybe later…let’s see how I feel about it next week.

Timelines You Need to Know

Hey, let’s give a big ‘ole cheer for FHA committing to a time line we can actually plan around…here is the actual verbiage in the press release:

• Mortgage Insurance Premium Increases – Will go into effect in the spring
• Updated combination of FICO scores and Down Payment (which is totally irrelevant in this market) – Will go into effect in the early summer
• Increase enforcement on FHA Lenders – (Protect consumers against fraud by lenders) would go into effect in early summer

Seriously, way to nail down those time lines so that borrowers can effectively plan for what lies in store for them if FHA is looking like the most likely option.

There’s no way I could make this stuff up….Stranger than fiction, I know – Go ahead and read the links to the actual Press Release and Mortgagee Letter is you like.

Here’s the bottom line the way I see it (in my not-so-humble opinion):

• Don’t buy a home unless you can afford to make the payments.
• If you’re a lender that provides home loans for folks, don’t rip them off or commit fraud.
  

Again, I find myself lacking the energy right now to eloquently embark on an intelligible rant that will only result in pointing out the obvious silliness of it all.

So, what do you think – Am I off base? Did I read this wrong? Am I a flaming jerk for injecting my opinion into this fine effort to protect us from the evils of those that wish to harm us and protect us from ourselves? Let me know – drop me a comment and let’s talk about it more.