The Department of Housing and Urban Development is the federal agency playing a major role in supporting American homeownership by underwriting mortgage loans for lower- and moderate-income families through its mortgage insurance programs, more commonly referred to as FHA mortgage loans. FHA mortgage loans allow the young millennials and others without a lot of money in the bank to use for a downpayment, to purchase a home.
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With the June 3, 2013 implementation of FHA Mortgagee Letter 2013-04, an FHA mortgage loan with a loan-to-value ratio exceeding 90% (a downpayment of less than 10%), will have a monthly mortgage insurance premium payment for the life of the loan, rather than terminating when the loan amortizes to a 78% loan-to-value. This change noticeably increases the annual percentage rate on FHA mortgage loans. Why does this matter? For one thing, it has caused numerous FHA mortgage loans to be designated as federal “higher-priced mortgage loans,” in other words, non-prime home loans. For example, a “plain vanilla” FHA 30-year fixed-rate loan with a note rate of 3.9% and less than 10% downpayment before this change would not have been a federal HPML, but now it is.
Regulation Z describes a higher-priced mortgage loan as a loan with an APR that exceeds the average prime offer rate for a comparable transaction by 1.5% or more for first lien loans, or by 3.5% or more for junior lien loans. California, Maine, Maryland, Massachusetts and Oklahoma contain similar definitions, with associated enhanced compliance requirements.
New York has a concept of “subprime home loan.” Guess what? Yes, you guessed it. This change caused a large number of New York loans to be defined as New York subprime home loans, consequently subjecting them to stringent regulations and restrictions, severely limiting the ability of New York homeowners to obtain mortgage financing, and disrupting the New York mortgage market. As a result, on July 3, 2013, the New York Department of Financial Services issued a temporary order allowing lenders to temporarily ignore these FHA mortgage loan increases to rates and terms, for purposes of calculating the New York subprime home loan APR. This may sound like a reprieve, but I have heard rumors that secondary market investors plan to ignore this temporary order and may or will refuse to purchase New York FHA mortgage loans that exceed the post-June 3 FHA Mortgagee Letter 2013-04 calculated APR, regardless of the temporary order.
FHA has stated it expects lenders to fully comply with all applicable existing Regulation Z HPML requirements and applicable state law, such as mandatory 5-year escrow accounts, prepayment penalty limitations, and ability-to-repay requirements. Here’s the rub. Until the CFPB ATR requirements take effect on January 10, 2014, current Federal HPML ATR requirements continue to apply. Although FHA believes its requirements in HUD Handbook 4155.1 satisfy these FHA-insured HPMLs, there are certain notable exceptions, such as streamline refinances and ARMs, depending on how they are underwritten. For example, HPML Streamline Refinances, where income or assets relied on are not verified by obtaining confirming documentation, do not meet existing HPML ability-to-repay requirements. For these exceptions, FHA states that lenders must go beyond the applicable FHA requirements to comply with federal HPML ability-to-repay requirements. Further, come Jan. 10, 2014, all of these FHA-insured HPMLs will exceed the Qualified Mortgage Loan Presumption of Compliance “safe harbor” rate threshold.
As an attorney focused on automated mortgage lending compliance, my hope is lenders are using automated loan origination and compliance engines to remain in compliance with all of these complex, unexpected, and last-minute requirements and calculation changes. What did we do before computers...abaci or abacuses (“worry beads”)? Yes, that’s what I want for Christmas, an abacas to calculate the APR.
