The Federal Housing Administration's HAWK initiative could help participating lenders with marketing, by differentiating them from the flock.
But as proposed, the program's mortgage insurance discounts for borrowers who receive counseling are too modest to find many takers, industry members say, especially given the rigor of the counseling regime, with pre-contract, pre-purchase and post-closing sessions.
"The HAWK program is a constructive program. But we don’t believe it is a substitute for substantive reduction in annual premiums which we continue to call for," says Scott Olson, executive director of the Community Home Lenders Association. It is hard to get borrowers to devote the time and effort to counseling, Olson says.
The FHA is preparing the program at a critical time. Single-family originations bearing the agency's stamp are dropping. Lenders made 164,415 FHA-insured loans in the first quarter, down 53% from a year earlier, according to FHA data. Lenders also are concerned that the FHA is being adversely selected because private mortgage insurance is more competitive and capturing the FHA's more creditworthy customers.
Lenders are beginning to see the marketing value of the counseling program, according to mortgage consultant Brian Chappelle, co-founder of Potomac Partners.
They don't want to be left out when FHA launches the HAWK pilot version this year with only a select number of lenders—possibly 10 or 20—authorized to offer the discounts.
"Every lender wants to participate so they can advertise that they are a HAWK lender. It has marketing value," Chappelle says.
FHA commissioner Carol Galante unveiled the Homeowners Armed with Knowledge program at a Mortgage Bankers Association meeting in April. The agency is proposing to lower its 175 basis point upfront loan fee by 50 basis points and its 135 basis point annual premium by 10 basis points at closing if the first-time borrower completes the counseling requirements.
If the loan is still performing after 18 months, the FHA will reduce the annual premium by another 15 to 110 basis points. The comment period on the proposal ends July 14.
At first glance, HAWK appears to gives the FHA, which charges high premiums, a safe way to offer a discount and make FHA loans a little more affordable.
"We know the borrowers who receive counseling are up to 30% less likely to default on their mortgage than buyers who don't," Galante told the MBA meeting.
But the agency can't go much further in lowering premiums at this time because the FHA is still recovering from losses due to the housing bust. And Galante is under pressure from Congress to complete the recapitalization of the FHA mortgage insurance fund.
The Mortgage Bankers Association is generally supportive of the HAWK program, according to Pete Mills, a senior vice president at the trade group. But "we are looking at some things that would improve HAWK from an affordability standpoint," he says.
The MBA would like to take the 50 basis point front-end discount and use it to reduce annual premiums by another 10 basis points.
"Under the MBA proposal, the borrower would get a larger reduction in their monthly payment," Mills says. (The front-end fee is a one-time charge. The borrower pays the annual fee every year for the life of the loan.)
Lenders will be anxious to see how the FHA reacts to the comment letters and other input it receives from the industry, consumer groups and Congress. Some are hoping FHA skips the pilot phase so any lender can participate when the voluntary program is launched.
House and Senate appropriators have already commented on the HAWK program in drafting their respective Department of Housing and Urban Development 2015 fiscal-year appropriations bills.
Lawmakers in the House objected to a proposed lender fee. The FHA plan calls for HAWK lenders to cover up to $250 of the cost of pre-purchase counseling and provide the borrower with a $100 voucher for post-closing counseling.
"The House Appropriations Committee has prohibited implementation of this new pilot program as it is dependent on implementation of a new fee on lenders. The committee encourages the authorizing committee of jurisdiction [the House Financial Services Committee] to consider the fee as proposed," the report says.
The Senate Appropriations Committee is more supportive. "The committee is hopeful that HAWK can provide a way to responsibly expand homeownership opportunities. While the committee supports the initiative, a separate appropriation is not included for it. Instead, HUD should use existing resources to implement the program," the report says.
House and Senate appropriators will reconcile their differences over the HAWK program later this summer.