In the June 2013 issue of National Mortgage Professional Magazine, I penned an article entitled “FHA Continues to Bail Itself Out on the Shoulders of New Borrowers.” In this piece, I discussed the fact that FHA’s decision at that time to raise mortgage insurance premiums (MIPs) was effectively forcing new FHA borrowers to bail FHA out from the poor loans of years past.
Would FHA have taken the time to do satisfactory market research on the impact of raising insurance premiums—for example, by speaking with MLOs and potential borrowers—they might have come to the conclusion that raising the premiums would decrease FHA volume… and thus, harm the FHA program. Had they not failed to survey potential first-time homebuyers (FTHB), they might also have had some important information that would have influenced a better long term strategy. Historical FHA data indicates that approximately 75-85 percent of FTHBs utilize FHA financing. When the FHA MIP was significantly lower than conventional MIP, it made better financial sense for borrowers to select FHA as the loan of choice. However, we now see clearly the choice consumers are making—and it’s clear that FHA is losing business to conventional MI loan programs.
In addition, the amount of FTHBs has decreased. According to a recent data from the National Association of Realtors (NAR), FTHBs accounted for only 26 percent of the January 2014 sales numbers, down from the historical 38-40 percent. It would thus appear that the decrease in FTHBs, coupled with the higher MIP, has significantly decreased new FHA insurance endorsements. This has forced FHA to make some changes, making it easier for lenders to approve loans. Thankfully, a step in the right direction …
In a move to stimulate FHA originations, FHA has made a bold and well needed move to bring more clarity to manually underwritten FHA loans that have higher ratios. These FHA changes essentially end the years of unsureness that plagued lenders when underwriting loans that exceeded ratios. Now lenders have clear guides on how to approve the classic make-sense FHA loans with ratios that exceed 31/43.
Mortgagee Letter 14-02 announced these revised manual underwriting requirements for forward mortgages. Here are the highlights of these changes which are effective April 21, 2014:
1. One- and two-unit properties must have cash reserves of one month PITI. Three and four units must have three months of reserves. (Previously only two months PITI were required for borrowers with insufficient credit.)
2. Maximum ratios for borrowers with scores below 580, or above 580 with NO compensating factors, may not exceed 31/43 (33/45 for Energy Efficient Homes), regardless of compensating factors. Non-owner occupant income cannot be included if scores are below 580, but can be included for non-traditional credit borrowers. Previously no maximum ratio limits were established and it was left up to the underwriter to decide.
3. Maximum ratios for borrowers with scores at or above 580 can go up to 37/47 if the Borrowers meet ONE of the following compensating factors or up to 40/50 if TWO of the following compensating factors are met:
►Three months cash reserves for one and two units; six months for three and four units;
►New payment cannot exceed the lesser of $100 or five percent of current housing expense; must have 12-month payment history with no 30-day late payments;
►Verified and documented significant additional income that is not considered effective income;
►Meet residual (net-disposable) income requirements as outlined on p. 14 of the mortgagee letter.
An opportunity to write more loans …
These changes will allow lenders to confidently target the FTHB market which likely has a vast number of borrowers with credit profiles that will require manual underwriting. FTHBs will now have a greater opportunity to qualify for FHA loans but they first have to become aware of the opportunity. The lenders that implement the marketing campaigns to attract FTHBs will win. I encourage all MLOs that want to develop more FTHB business to get this information out to your real estate agents before your competition does.
These changes are not enough!
When FHA was formed by the Roosevelt Administration in 1934, it was the loan of choice for the hard-working Americans that had a dream of owning their own home … and FHA filled this role beautifully until the recent leadership began making changes that kept making FHA more and more like a conventional product; the increase in MIP being only the most recent example.
With the expected surplus in the Mutual Mortgage Insurance Fund, FHA needs to listen to what the market is saying and lower the MIP to restore FHA as the clear loan of choice for FTHBs. The FHA loan has always been the ray of hope for millions of potential home buyers, and it’s time for the real FHA to stand up and fulfill the original mission of helping the hard-working American attain homeownership.
Jeff Mifsud is founder of Michigan-based Mortgage Seminars LLC, a former FHA underwriter with 15-plus years of experience originating FHA loans, an FHA expert for LoanToolbox.com and creator of The FHA Originator, a monthly FHA newsletter. Jeff may be reached by phone at (248) 403-8181 or visit www.MortgageSeminars.com.
This article originally appeared in the April 2014 issue of National Mortgage Professional Magazine.