Can it be?
Is it official?
Is FHA lending the new subprime?
We have all thought about it and have kept our fingers crossed that it isn't so. But to some in the industry they believe FHA lending has replaced subprime lending, with its no or low down payment and minimum credit score requirements.
Let's explore some of this.. Last week we saw the FHA's capital ratio fall to just 0.53 percent, this was well below the Congressionally mandated two-percent minimum, thanks to its increased role in the home lending space and steadily rising defaults. But has this been to over leveraged buyers or mostly due to the declining job market? As for the buyers, I personally do not think they are over leveraging from my point of view. We've been able to approve loans fairly well by assessing the risk of each buyer. I do not believe any lender is putting themselves out there to fail. There are a lot of variables that are causing the defaults within the realm of FHA loans. However, of course we are going to still see a decline in subprime and prime loans that the Adjustable rates are soon to reset. That is another blog!
This really caught my attention, when one of the nation's largest home builders comes out and says something is crap, that's when you start to question whether it's bad. Or is it really, really bad?
The CEO of Toll Brothers, Robert Toll, said on Wednesday at a New York home builders conference that FHA lending could create another huge crisis in the mortgage industry, referring to it as "yesterday's subprime." He also went as far as calling it a "definite train wreck," noting that a "flag will go up in the next couple of months" for bail out money.
Of course, FHA boss Shaun Donovan said last week that the FHA has $31 billion in reserves to protect itself, representing 4.5 percent of total insurance in force. And they're working on policy changes to make it more difficult for unscrupulous lenders to originate bad loans. But with 456,000 FHA loans in default, or 8.2 percent as of September, you have to wonder if we've got another huge bailout on our hands. However, there are many changes that can be made to offset any chance of a taxpayer financed bailout. Let's keep in mind, regardless of the political and rhetorical opinions, FHA has been an instrumental piece of the backbone of our economy. My personal beliefs are that FHA will come around on it's own and thus still remain one of the most important elements to our country's economic recovery (As it always has since the Great Depression) (Read on)
The FHA/ Federal Housing Administration announced today that it will make a wide series of changes in it's lending requirements and policies in reaction to its capital reserve ratio falling below the congressionally-mandated two percent minimum.
FHA Commissioner David H. Stevens stated "To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action. That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections."
Effective January 1, FHA will require supervised mortgagees to submit audited financial statements to ensure such entities are adequately capitalized.
The FHA may also up the net-worth requirement of mortgagees, from the current $250,000 to $1,000,000, which would likely lead to consolidation in the industry.
Mortgage brokers will still to be able to originate FHA-insured loans through their relationships with approved mortgagees, but will no longer receive independent FHA approval for origination eligibility.
"These policy changes will require the FHA approved mortgagee to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee."
The FHA will also revise procedures for streamlined refinance transactions, establishing new requirements for seasoning, payment history, income verification, collection of credit score, and so on.
"These revisions bring documentation standards for streamline refinance transactions in line with other FHA loan origination guidelines, ensures the borrower's capacity to repay the new mortgage, and prohibits the dangerous practice of loan churning, where borrowers raise cash through successive cash-out refinancings that put them further in debt."
New appraisal guidelines will also come into effect; the appraisal validity period will be reduced to four months from six for all properties, though appraisal portability rules (transferring an appraisal from one lender to another) will ease.
The FHA will also adopt the language of the Home Valuation Code of Conduct (HVCC), meaning brokers will be prohibited from ordering appraisals.
Stevens also announced that a Chief Risk Officer will be hired for the first time in the FHA's 75-year history to oversee and propose specific credit policy changes going forward.
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