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FHA Mortgage Program Shows Strong Results

by Peter G. Miller
March 17th, 2010

The FHA numbers for February have been released and the program continues to look remarkably strong.

The FHA mortgage program is on track to do more than 2 million loans in 2010. That’s a huge number but down 29.5 percent from 2009.

Given about 5 million existing home sales and perhaps 350,000 new home transactions during the coming year, it means that FHA market share will decline, something that should elate program critics. The reason for the lower market share, of course, is that not all FHA home loans are used to purchase real estate, many are instead originated to refinance existing loans.

Credit Scores

Average credit scores in February were are at 693. This is a very credible figure given that the FHA program is generally associated with entry-level borrowers. A year-ago the average score was 663, suggesting a considerable tightening of FHA loan guidelines.

What’s plainly at work here are lenders who are “layering” FHA standards. The FHA says it wants borrowers with 3.5 percent down to have a credit score of at least 580. If you don’t have 580 then new standards which will likely go into effect this summer will require at least 10 percent down.

The new FHA guidelines are both attractive and useless. Yes, the FHA should demand credit scores, something it has not done in the past. Yes, the FHA should demand more down for people with weak credit histories.

But a required score of just 580 is absurd. It’s more than 100 points less than the typical FHA borrower now rates. Effectively, it’s no requirement at all for the overwhelming majority of FHA mortgage borrowers.

Alternatively, if the idea of minimum credit scores is to keep out marginal borrowers — a savvy thought for any insurance program — then lenders in this case are doing the right thing. There should be far fewer claims against the FHA reserve fund — and thus less pressure to raise down payment requirements and insurance premiums — with higher credit score demands.

Defaults

The FHA says “for February, 553,929 mortgages were in a seriously delinquent status (90 days +) for a default rate of 9.2 percent”

The FHA also says that “so far this fiscal year, FHA has paid 100,428 claims. Most have been loss mitigation retention claims.”

Translation: The FHA has a very high “cure” rate –the ability to save delinquent borrowers from foreclosure.

Reverse Mortgages

Reverse mortgage originations are down 22.7 percent when compared with 2009. What the government calls home equity conversion mortgages — HECMs — have been a trouble spot for the FHA because of high claim levels.

The problem here is not so much that there are more claims but rather than home values in most markets have been falling. This means that in too many cases homes can no longer be sold to fully pay off reverse mortgages — loans which are essentially gigantic negatively-amortizing mortgages. If home prices were stable or rising the FHA would face fewer claims from lenders.

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