DEC 13, 2013

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What We're Hearing

FHA Sticking with High Premiums Even With Good Financial Report


WE'RE HEARING the Federal Housing Administration has no intention of reducing its mortgage insurance premiums despite the release of its actuarial report that shows FHA is finally recovering from the housing bust.

The only relief from the 175 basis point upfront fee and the 135 bp annual fee might come in the form of a deduction for first-time homebuyers if they receive housing counseling. FHA wants to provides incentives for borrowers to take counseling to ensure they understand the importance of making their monthly payments on time and notifying their servicers if they are getting into financial trouble.

While current premium structure is expensive, the Federal Housing Administration needs that revenue to cover the losses on its legacy loans and rebuild the capital of the FHA Mutual Mortgage Insurance Fund.

The FHA single-family program ended fiscal year 2013 with a negative net worth of $7.8 billion  after providing a $4.3 billion capital infusion for the FHA reverse mortgage program.

The independent auditors are projecting that the single-family program will have a positive net worth of $7.8 billion by the end of FY 2014. So in one year the fund will see a $15.7 billion improvement if the auditors are right.

In other words, this is no time to retreat when HUD is so close to replenishing the FHA fund. So don’t expected FHA commissioner Carol Galante to give up on those “richer” premiums anytime soon.

The actuarial report shows that FHA endorsed $240 in single-family loans in FY 2013 and they expect to do $190 billion in FY 2014.

But the agency has made recent moves that make it tougher to qualify for a FHA-insured loan. First, FHA has tweaked its automated underwriting system Total Scorecard to reduce the number of applicants that are automatically approved or rejected. The idea is to force the lenders to use manual underwriting to approve more borrowers by resorting to compensating factors.

However, the new manual underwriting guidance says borrowers must have cash reserves equal to the first month’s mortgage payment, which is a new requirement. At the same time, FHA has capped the borrower’s back-end debt ratio at 50%, which is new. So the borrower’s mortgage, car and other debt payments can’t exceed 50% of their income. These new requirements don’t apply to borrowers approved via Total Scorecard.

First, lenders don’t like manual underwriting. Automated underwriting provides greater assurance that FHA or an investor won’t seek indemnification or a buyback if the loan goes bad. And second, FHA has tightened the underwriting so there likely will be fewer manually approved loans.

However, FHA believes going back to manual underwriting will make lenders sharper and lead to more creditworthy borrowers.

“Using manual underwriting more frequently gives lenders the tools to know how and when to apply compensating factors to determine borrower qualifications,” Galante said. “Relying solely on a credit score or the size of the downpayment excludes qualified families and holds back our nation's economic recovery.” She spoke at a Consumer Federation of America financial services conference on Dec. 6.

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