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Manual underwriting could tip the balance between FHA and agency loans further toward the latter. Image. Fotolia.
Manual underwriting could tip the balance between FHA and agency loans further toward the latter. Image. Fotolia.

FHA Manual Underwriting May Not Be the Answer

JAN 31, 2014 6:00pm ET
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More borrowers are turning to Fannie Mae and Freddie Mac loans and away from FHA-insured loans.

While that is not new, the trend could accelerate this summer.

In presenting Ryland Group’s fourth-quarter results, the homebuilder’s top executive, Larry Nickolson, included a multiyear chart showing the percentage decline in Ryland’s FHA originations.

“The trend away from FHA loans continued in the fourth quarter as only 18% of our buyers opted for one of those loans,” he told analysts and investors during a conference call.

“Of the remaining buyers that utilized our mortgage company, 65% chose a prime (GSE) loan,” the chief executive said.

After raising its mortgage insurance premiums for the past several years, FHA now charges a 175 basis point upfront fee and a 135 basis point annual premium. These high premiums have made GSE loans more competitive.

Meanwhile, 57% of Ryland Mortgage customers chose a GSE loan in 2013, up from 49% in the prior year. Just 25% of buyers chose a FHA loan, compared to 33% in 2012. The share of VA and Rural Housing Service loans remain unchanged year-over-year at 16% for VA and 2% for RHS.

Back in 2011, FHA loans comprised 38% of Ryland’s loan production compared to 42% GSE.

This downward trend could speed up as FHA officials try to get lenders to manually underwrite more loans. Agency officials believe lenders will be able to qualify more borrowers with sub-680 credit scores via manual underwriting. And they are tweaking FHA’s automated underwriting system (known as Total Scorecard) so more loans are rejected and referred for manual underwriting.

But it is unclear if lenders will follow this new path. And there is concern they will simply limit originations to plain-vanilla FHA loans approved by Total Scorecard.

Lenders continue to be skittish because of liability and repurchase concerns, according to mortgage consultant Brian Chappelle.

“The jury is out on how the industry will accept this,” he said.

COMMENTS OF THE WEEK: Often the comments box is a little hard for editors to read. This week, for instance, someone commented on a blog with a terse "you are nutz." But we feel better whenever we get a heartfelt comment like the one below, from an (alas, unidentified) loan officer who has exactly the right spirit and drive to succeed! He replies to our blog about why loan officers are still attracted to mortgages despite industry hard times: "I am a brand-new LO and agree with some of Mark's statements above. I have a young family, a wife that is in grad school, and on top of all of that a job that is straight commission based. Becoming a loan officer is a risky avenue to venture to say the least, especially if you don't have the right mindset going into it. I don't have a four-year degree, and don't have a fall-back plan for attaining a solid income. What I do have is unparalleled drive, motivation, and an eagerness to learn. I am already doing business with the top two agents in one county, the top agent in another, and a builder account in a new development in my county. Did I mention I didn't even know what an interest rate was three months ago? Haha! My point is that it can be done, but it takes a special kind of willpower to succeed. I spend time every single day to read any articles I can find about our industry like this one. I am "all in" on this career choice and won't take failure as an option. I have spent more money on gas going to visit prospects than I can even afford, but it's paying off. Sometimes it doesn't take a person that has a degree in finance or an MBA to succeed in this job, or any other for that matter. It takes someone that is truly up for the challenge and is dedicated to continued education on the materials that can make you better. I have taken something from each one of the responses you all have taken the time to post, and appreciate any and all of the insight you have to offer!"

MOST READ/EMAILED: Brian's story on FHA using an alternate method to qualify borrowers using residual income was the most read content on our website this week. In an era of diminished mortgage volume, qualifying borrowers obviously becomes a thing of great interest. The most emailed content was Kate Berry's piece on the Fannie Mae "blacklist" of appraisers it deems shady. Not to panic, though, as so far there are only four appraisers on the #$%^ list!

THE BIG TWENTY THOUSAND: We've done it! We have hit 20,000 Twitter followers. Thank you to all of you have "followed" us, and for the rest of you, come on over to @natmortgagenews and follow us now. It is not too late! Lady Gaga and Justin Bieber are in no immediate danger of being eclipsed, but we have a large and vibrant mortgage community on Twitter. And our Twitter feed is often the fastest way we get news to you, sometimes well before our daily newsletters. So you just might learn something.

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.

Comments (3)
I enjoyed the un-named LO's remarks. So refreshing from all the negative I've been reading.
Posted by | Monday, February 03 2014 at 11:47AM ET
I would agree with Brian Chappelle's comment on FHA manual underwriting. Lenders, and their underwriters, will continue to be skittish because of the liability and repurchase concerns. What is in it for the underwriter that sticks his or her neck out and gets it wrong 2% of the time?
Posted by JIM P | Monday, February 03 2014 at 2:04PM ET
Good information on the reduction of FHA loans, but not surprising. I agree with the previous comments, that the comments made by the loan officer new to this industry were very refreshing. I'm not new to this industry and need to hear success stories like that once in a while.
Posted by | Monday, February 03 2014 at 4:03PM ET
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