The New York State Department of Financial Services has issued a temporary order that relaxes the definition of subprime home loans as it applies to Federal Housing Administration loans for a period of 60 days. At the same time, Rholda Ricketts, the deputy superintendent in charge of mortgage banking, has written a letter providing “guidance” to conforming lenders regarding that same definition.
The recent spike in interest rates, and in FHA’s case, the change to require the mortgage insurance premium to be paid throughout the life of the loan has disrupted, if not outright seized up, the mortgage lending business in the state.
Both the letter and the order were issued on July 3.
In the temporary order, the state said the FHA June 3 change “severely limited the ability of New York homeowners to obtain mortgage financing.” This is because the rising rates over the past few weeks plus the MIP change has pushed the “fully indexed rate” (which is related to the annual percentage rate) above the threshold for a “subprime home loan.”
The legal firm of Abrams Garfinkel Margolis Bergson is counsel to the Empire State Mortgage Bankers Association. Michael Barrone, a partner at the firm, said until now, the subprime home loan threshold had not been a problem. But the rule did not take into account market fluctuations like what has been occurring over the past six weeks.
Borrowers, both conforming and FHA, have been going to the closing table only to find the process halted when a recalculation finds APR on the loans has risen above the subprime home loan threshold. This is because lenders are now unable to sell these loans to secondary market investors.
So ESMBA went to the DFS with some proposals for relief, including increasing the margin for a loan to go above the threshold.
Barrone explained that for FHA loans, the order rolls back the calculation of APR to what it was prior to the MIP change.
The DFS order states, “It is expected this disruption will self-correct over time as applicable lagging mortgage rate indices align with actual market rates, but that limited intervention is warranted now to foster market stability.”
Ricketts, in her letter, makes the statement that the rule was amended in 2009 to address the issue of some lenders using the closing date of a loan as the period to determine the fully indexed rate.
She pointed out that for a fixed-rate loan the calculation is to be made at the time the lender issues its commitment. Barrone noted this is still ambiguous because commitment is not defined.
For adjustable-rate mortgages, the rule says the calculation is to be made “on the date the lender provides the ‘good faith estimate,’” the letter noted.
“The department believes that the proper application of the definitions for determining the fully indexed rate for a loan should alleviate, if not eliminate, the stresses that some lenders may have been experiencing in recent weeks,” Ricketts said in the letter.