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.
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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.