FHASecure: Sub-prime fix, or fiasco?Chip Cummings, CMCFHA, HUD, delinquency or foreclosure, FHASecure program
Everywhere you turn, all you hear about is the "mortgage
meltdown." The world is coming to an end, and Mortgage Brokers are
the root of all the evil, doom and destruction. Yeah, right.
Then, out of nowhere, the Federal
Housing Administration (FHA) rides up on a white horse and
announces a new initiative designed to save 240,000 borrowers from
foreclosure and rescue people from those nasty sub-prime loans that
they fell prey to. Could it be possible? Well, yes and no. On Sept.
5 of this year, FHA released the details of the new FHASecure
program (ML 07-11), touted as a way to refinance borrowers who are
facing delinquency or foreclosure from payment increases due to
adjustable-rate mortgage (ARM) interest rate resets. On the face of
it, it sounds pretty good, but will it actually work? And if so,
how? And with what investors? As a national FHA trainer, and one
who has originated more than a few FHA loans over the past 20
years, I decided to dig into this new initiative and see if
originators can actually fill up their pipelines with this creative
program.
The nuts and bolts
To start, I analyzed the Mortgagee Letter (ML) itself, and then
interviewed several people from the U.S. Department of Housing and Urban
Development (HUD) and different national wholesalers to get a
consensus on what the real deal is. I have held several Webinars on
the topic and talked to originators around the country to get a
take on how it's playing out in the real world. First, let's look
at the specific requirements.
The FHASecure initiative is open to any authorized FHA lender--so,
actually, all of your current investors have access to the program,
if they choose. The borrower must have a non-FHA ARM that has an
interest rate that resets sometime between June 2005 and December
2008. In addition, they have to have had a good payment history for
at least six months prior to the reset.
But the borrower can actually be currently delinquent or even in
foreclosure at the time of application, and you can roll in all the
costs and overdue payments into the new mortgage amount! Sounds
pretty good so far, but wait--it gets better. While the loan
amounts and loan-to-value ratios (LTVs) are limited to the normal
statutory limits, you can exceed those under certain circumstances.
The lender can place a second mortgage for any costs and delinquent
payments if it's necessary, and exceed 100 percent LTV or even the
FHA county limits!
To make it even easier, any payments on that second can be
deferred, and not even counted in the ratios, but only if no
payments are due for at least 36 months. Wow--sounds like a dream
come true so far.
In underwriting the loan, normal ratio guidelines of 31/43 are
used, but they can be exceeded depending on compensating factors.
But here's where reality starts to sink in: The major problem is
that the likelihood of getting this loan through the automated
underwriting system (TOTAL Scorecard) is remote at best. After all,
the borrowers are probably pretty damaged at this point! This means
almost all FHASecure loans will have to be manually
underwritten.
To make this loan program work, underwriters and processors will
need to carefully examine and document the circumstances
surrounding the borrowers' problems. Is it really due to the reset?
Or are they just buying time? Careful examination of the credit and
payment histories will reveal whether or not the new loan will save
them, or just prolong the inevitable.
Carefully document the entire situation. Look at other credit
accounts and their long-term history. Did they just temporarily get
in over their head, or is this a systematic problem? The borrower's
employment history should be stable and indicate responsible
spending patterns. If there are deeper issues causing the mortgage
delinquency, then you have an obligation to counsel them to get it
fixed, not just originate another commission.
In addition, many of the properties may be located in "declining
areas," which is the code name for appraisal problems. The ML
actually addresses this as well and permits insuring of properties
in those distressed areas, but the appraiser will have to clearly
document the market conditions. Regardless, the lender is still
held responsible for the quality of the appraisal.
No special forms or disclosures are required to participate in the
program, but the underwriter must make a comment on the Mortgage
Credit Analysis Worksheet indicating that the loan was underwritten
using the FHASecure guidelines, and specifically address the
circumstances surrounding the borrowers situation. If the borrower
is currently in a forbearance agreement, you need to document that
all terms have been met in a timely fashion. Well, it sounds like
there are a lot of borrowers we can help out there--what's the
catch?
The big problem
The big problem is loss mitigation. While the program has great
possibilities, FHA has forgotten one key element--who gets tagged
with the losses? Most of the lenders and credit risk analysts I
spoke with have one overriding concern: Am I just inheriting
someone else's foreclosure, and how will that affect our overall
performance numbers?
This is a justified concern, and one that will jeopardize the
success, or even implementation, of the program. There are still
some details that remain a little fuzzy--and will remain so until
we start to see some precedents being set. But the bottom line is
that lenders don't want to get another loan on the books just to
have it go into the real-estate owned portfolio. As a direct
endorsement underwriter who underwrites the loan, who gets tagged
for the loss when it goes south? What about my costs, time and
secondary losses if the loan doesn't perform?
These issues and more are being batted around in risk management
circles around the country. Several investors have indicated that
they will offer the program only to existing brokers who have a
proven track record. Others are standing on the sidelines until FHA
provides a little more support. Either way, the success or failure
of the program will come down to the quality of the
origination.
There are borrowers who are hurting out there, many who have been
taken advantage of or found themselves in circumstances that were
beyond their control. Loan officers who carefully examine those
circumstances and originate loans that fit the spirit and purpose
of the FHASecure initiative will not only find their pipelines
filled with profitable loans and happy clients, but will be the
catalyst for the long-term success of the program.
For too long, we as an industry have opened the door, which
allowed a few bad apples to tarnish an entire loan category which,
in most circumstances, has been an important part of creating new
homeowners and building equity. Sub-prime loans serve an important
and necessary market segment. Handled the right way, this new
program offered by FHA can do the same thing. Let's make it work,
and show the media the true nature of the professional Mortgage
Broker.
Note: To download a copy of the ML and other related
FHA releases, go to www.fha-lending.com/webinar029.
Chip Cummings, CMC is president of Northwind Financial
Corporation, an international speaker, trainer and consultant to
the mortgage industry, and author of "Stop Selling and Start
Listening!--Marketing Strategies That Create Top Producers." He can
be reached at (616) 977-7900 or at www.chipcummings.com.
