Will The FHA Spigot Be Closed Off?

by Peter G. Miller
July 6th, 2009

Will borrowers be denied FHA loans because of changing lender standards? Not FHA standards, but instead the standards used by lenders who are then insured by the FHA when they originate mortgages.

Nathan Reynolds writes and says that “when my office began offering low “fixed” rate FHA mortgages we successfully provided relief to 100’s of homeowners. I know this for a fact because by tracking the loans we have originated, there is less than a 3% default rate for a period of almost 3 years now.

“March 15th 2008 almost every lender started requiring Fico scores of a minimum of 580. And now that has minimum score requirement has risen to a 620 Fico score and even this score comes with risk based hits to the yield spread premium thus making the lowest rates unattainable.

“I recently spoke at a Foreclosure Education Summit and had the opportunity to speak with a representative from HUD who informed me she wouldn’t be surprised if lenders increased the minimum to a 680 Fico before years end!”

Judging from various email and comments I have read, I suspect that other loan officers have seen the same trend, the idea that basic FHA requirements are increasingly deemed inadequate by lenders, thus resulting in the denial of loans to otherwise-qualified borrowers.

If you think about this you can see an oddity here: Under the FHA program lenders have no real risk — if a borrower defaults the lender’s loss on the principal is fully covered. For this reason you could say that lenders have no reason to tighten the standards beyond FHA minimums.

The catch is that lenders do have risk if it is found out that they originated FHA loans that did not actually meet FHA requirements. In May, for example, HUD announced that it had taken ”actions against more than 120 lenders for violating FHA requirements. Violations range from failure to conduct sufficient quality control, to failure to continue to meet FHA recertification requirements, to falsifying loan documents.”

Among the lenders cited, HUD says that “102 lenders had their FHA approval withdrawn, five lenders agreed to make indemnification payments to FHA totaling more than $500,000, and 24 lenders were accessed fines or administrative costs totaling more than $1.2 million.”

In other words, one reason why lenders may be looking for higher FICO scores beyond FHA loan guidelines is not because they want to make things harder for borrowers, not because they want to raise interest rates, but because they want to make sure that loan officers and underwriters follow FHA standards.

In today’s world, if you’re a lender and you’re dumped from the FHA program you have lost the ability to offer one of the most appealing and successful loan products now available. That makes it a lot tougher to be a lender.

Are lenders right to tighten standards? The answer is yes given the abuses seen in the private sector during past decade.  Unfortunately, borrowers — as usual — as the ones who will suffer.  9548g7zi3r

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One Response to “Will The FHA Spigot Be Closed Off?”

  1. Nathan Reynolds Says:

    Thank you for posting my comments on your recent article. I felt it was very important to get the word out on this current trend. I do want to comment further on your response as I respectfully disagree with your conclusion!

    I am a mortgage broker and because I applied and was approved by HUD to offer FHA loans I am considered an FHA approved “LENDER”. This title causes confusion to many when you reference FHA “LENDERS”. Many of the “Lenders” you referenced are in fact 3rd party loan originators that failed to meet the standards established by HUD to maintain their License and were therefore fined or had their ability to offer FHA insured mortgages terminated. HUD has an excellent system of checks and balances in place to avoid the very same outcome of the unregulated mortgage industry.

    The “Banks” (I prefer not to name names, but your readers know) that wholesale the loans are the ones that are raising the eligibility standards. Although “Banks” have the ability to manually underwrite FHA mortgage loans applications very few are opting to do so due to the risk of having underwritten an uninsurable FHA loan. The majority of all FHA loan applications are underwritten in strict accordance to FannieMae Desk top Originator automated findings. This software renders a decision based on the homeowners credit worthiness, income, assets, and home value. This automated underwriting decision is Black and White, there is no room for variance. All the Bank/Lender has to do is verify all of the required documentation per the automated approval.

    This being the fact, I ask you where is the additional risk that justifies the tighter standards that Banks are imposing on homeowners? These are not Sub prime borrowers that need stated loans; these are income qualifying full documentation borrowers with equity and reserves that qualify for a mortgage in accordance with FHA underwriting guidelines that desperately need relief from their high interest rate adjustable rate mortgages now!

    So why have the Banks chosen to disqualify eligible homeowners based on a Fico Score? And if a homeowner does meet the Banks minimum required Fico Score, why do they impose additional risk based pricing for the very same homeowner effectively pushing the interest rate higher? Millions of eligible homeowners are not being afforded the opportunity to succeed in a low fixed rate FHA mortgage.

    FHA isn’t a 1st class ticket on an airline for the rich; it was intended as a vehicle for the working class!

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