FHA Mortgage, Interest Rates and Marketing

While reviewing our neighborhood watch data,   I did some digging into the national data by loan purpose.  Historically FHA Refinances had the lowest default rate in the portfolio, but these are not historical times.

By actually breaking the data down by the types of transactions we are able to identify riskier loans in our portfolio and change our guidelines as needed.

While we have always looked at refinances as a lower risk loan, declining home values and all of the media about “giving homes back when you are upside down” have caused defaults on refinance to rise rapidly.

At the end of 2008 FHA data stood as follows:

And now in 2010:

The default rates for Existing Home Purchases has increased very little while the default rates for New Construction/New Homes and Refinances both increased significantly.

I think HUD is taking some great steps toward curbing the high default rates with the new initiatives to target underwriting lenders with neighborhood watch.   FHA will continue to tighten their guidelines, but nothing will help more than terminating the lenders with high default rates.  This will force self governance into the remaining lenders under fear of termination.  For years there were no consequences for making “Bad” FHA loans,  when the loans defaulted HUD paid the claim and the lender did not suffer.  This lead many lenders to disregard prudent lending practices.

When ever I see a lender “advertising” that they will make loans no one else will, its a red flag.   Months before LendAmerica was terminated I had a case transfer request from one of their loan officers for a loan we had declined.  The loan officer mentioned that if we had any other loans “we couldn’t get done” that we should send them to him, because his company was “very good at manually underwriting loans.”

I saw similar postings from Topdot who was also shut down, I think they used that same term “very good at manually underwriting loans”.  I think this has become industry code for “we approve any loan we think we can get away with”.

Most recently I saw a lender advertise that they would take Debt To Income Ratios of 57% on a manual underwrite.  This comes at the same time that many lenders are limiting Debt To Income Ratios to only 50% of income regardless of a TOTAL Scorecard approval from HUDs computer system (which will often approve loans in the high 50’s).

So if all brokers and loan officers now send this 1 particular lender all of the loans over a 50% DTI, because they are advertising they will take loans up to 57%, whats going to happen?  They will make a lot of money in the short term due to the influx of business and then HUD will shut them down under the new neighborhood watch initiatives after a few months of these loans defaulting (and they will default).

Without these new initiatives this lender would have no consequence for taking these loans.   Under the previous Neighborhood Watch rules, HUD only held the originator responsible,  not the underwriting lender.

I watch the moves made by lenders like Chase, BB&T, Suntrust, and Wells.  They see thousands of more loans than I do so they can see trends developing before I can.  If they are all making moves to limit the DTI to 50% it means they have seen a jump in defaults for these loans.

Many smaller lenders look at this as a market opportunity – if the big lenders don’t want these loans anymore there won’t be any competition on them.  This is true,  LendAmerica carved out a niche just like this when the big lenders cut off loans below a 620 credit score and LendAmerica continued to approve loans down to the mid 500’s.  They were able to make many loans with no competition that fell in this bracket.

At this point he message is clear, although many lender still are not listening – If you have high defaults, HUD will shut you down.  I think when the first round of terminations under the new neighborhood watch initiative happen in late April, Lenders will start to listen.

Its a numbers games, if you have more than 2 times as many defaults as your peers you will be shut down.  If your peers are all limiting credit scores to 620+ and DTIs to 50% or less, what do you think will happen if you don’t?

The Federal Government is having to perform an interesting balancing act to attempt to stabilize the economy but defend against mounting mortgage losses.  In the past month both FHA and FNMA have announced tightening guidelines.  Some of these changes will make it more difficult for many homeowners to qualify for a much needed refinance or to buy a new home.

The actual changes for FNMA have been announced, while FHA has only announced that changes are on the way.  The FNMA changes took effect with the release of their most recent software update, Desktop Underwriter 8.0.

Prior to the changes FNMA’s Desktop Underwriter would routinely accept Debt to Income Ratios as high as 64.99%.  This would mean that a family earning $4,000 PRE TAX could have monthly debts that total $2,599 monthly.  While this allowed many homeowners to purchase larger houses or accumulate considerable debt, it wasn’t ever in the homeowners best interest.

The fact that FNMA uses pre tax income means that with 64.99% going toward debt, it wouldn’t be possible to live.  Let’s take a look at the numbers.

The Debt Counted by FNMA does not include many of the costs of home-ownership and survival.  It only counts mortgage payment, property taxes, hazard insurance, and loans.  This does not include car insurance, electric bill, water bill, food, health care, phone service, or any other expenses of living.

So with our remaining $901 lets assume $200 monthly for Electric, $30 monthly for Water/Sewer, $40 for Phone (Cell or Home, but not both), and Car Insurance $180.

So a homeowner would now have $451 left without ever leaving the house, or eating!  We’ll budget another $300 per month for food and $100 for Gas leaving the homeowner with $51. This doesn’t leave money for cable, oil changes, clothes, home repairs, entertainment, savings, or anything else. 

Why would an agency like FNMA set their computer underwriting system to allow a homeowner to take on so much debt.  Before the computer system was released the maximum debt to income ratio was set around 41% but with the release of DU back in the late 90’s the system has routinely allowed 64.99% of a homeowners income to be spent on debt.  This most recent release sets the maximum back down to 45% which is a much more realistic percentage of income to be spent on debt.

My issue is not with the 45%, I think its a much smarter guidelines.  My issue is all of the homeowners who were allowed to purchase homes using 64% of their income and now if they want to refinance to take advantage of today’s low interest rates they will not qualify.

Additionally, FNMA has raised their minimum credit score to 620, which I think was a smart move.  Most of the large lending institutions had already set a minimum score of 620.  This allowed a group of smaller lenders and brokers to continue offering loans between 580 and 620 with almost no competition. They used this as leverage to prey on homeowners and home buyers and charge exorbitant rates and fees.  With these added fees and higher rates, these homeowners were again set up for failure.

Although FHA has not yet released the actual changes they will make, they have announced that they will be increasing minimum credit scores, increasing down payments, and increasing the monthly cost of FHA Mortgage Insurance Premiums.  Once the new guidelines are released, I will be posting them here.

-With the upcoming HUD changes that may no longer require mortgage brokers to seek approval directly from the FHA, it will become more important for borrowers to independently verify the credibility of any lender they do business with. 

For those of us that meet the new HUD Net-worth Requirements (1,000,000 as of 12/31/2010 and 2,500,000 as of 12/31/2012) we will retain our FHA approval.  Based on the numbers released from HUD only 500 – 600 of the current 13,000+ FHA Approved entities will be able to meet these requirements.  We will still appear on FHA’s website as approved institutions – RP Funding FHA Listing or the new more attractive listing – RP Funding FHA Approval.

Additionally, approval by the Better Business Bureau may become more important.  The BBB maintains a rating for all accredited business that can be viewed online.  You can see RP Funding BBB Rating by visiting the website.

Other factors may include memberships to organizations like MERS, the Mortgage Electronic Registration System, they also publish a profile of the member lenders.  MERS Profile – RP Funding.

As default rates on FHA Loans continue to soar, most lenders have once again raised credit score requirements.  Last year we saw FHA minimum scores set at 580, and now they have been raised to 620.  I think its important to note that FHA is not setting these minimum scores, but the lenders who make the FHA Insured Mortgage Loans.

According to the March 2009 HUD Neighborhood Watch Data, 8.16% of FHA Loans Originated in Florida over the last 2 years are 90 days past due as of December 2008.  This is up from only 1.81% in June of 2006, a 4 and 1/2 times increase.

An additional 11.63% of all FHA Loans in Florida are currently 30 or 60 days past due, but have not yet hit 90 days to be considered “in default”.   

The major FHA Servicers are taking serious steps to try and get defaults under control.  In addition to the new 620 credit score requirements, many have cut off loans originated by mortgage brokers.  We have also seen restrictions on borrowers with no credit scores, reduction in cash out loan to values and restrictions on higher debt to income ratios.

 I am sure there are a few lenders left out there taking FHA Loans under 620 score, but expect to pay a higher rate and jump through a lot of extra hoops to obtain an approval.  If you have a 580 credit score and are trying to buy a home or refinance with an FHA Loan, your best bet is take steps to try and improve your credit score.

After dodging the bullet a few times over the past few years, seller funded DPA is finally gone. This time it will take more than a court order to save Seller Funded Down Payment Assistance.  A new bill passed by the house and the senate and expected to be signed into law by the President, bans seller funded down payment assistance on FHA loans.  These are companies like Nehemiah, Ameridream, American Family Funds, The Dove Foundation, etc.

 On top of banning DAP they also INCREASED THE FHA MINIMUM DOWN PAYMENT TO 3.5% from 3%.  Making it even harder to buy a home. 

Many people had no idea that the Housing and Economic Recovery Act of 2008 included:

 The house passed the bill last Wednesday and the senate passed it today, Saturday.  All that’s left is for the president to sign the bill.

This bill is going to do a lot of great things, don’t get me wrong.  But I think they picked a poor time to decide to make buying a home harder.  Some estimates indicate that 30% of home-buyers were just taken out of the market with this new requirement for 3.5% down.  To buy a $200,000 house a buyer now needs at least $7,000 of their own money!  As it stands today the buyer can buy they same house with very little money out of pocket.  With the recent changes in fanniemae and freddiemac this eliminates the last source of “No Money Down” financing to purchase a home.

The president has already agreed to sign the bill, since the clause to ban down payment assistance is a part of the 300 billion dollar package to help Americans keep their homes (like he can really veto that!)

This change is going to hit New Home Builders and Manufactured Home Dealers the hardest.  They used the programs extensively to move inventory.  I would say 80% of the new construction loans my company funds have Seller Funded Down Payment Assistance.  Lucky for us New Construction only makes up about 10% of our overall volume. 

HUD Announced the much awaited changes to the FHA Mortgage Insurance Premiums (MIP) and Up-Front Mortgage Insurance Premiums (UFMIP) based on LTV and Credit Score.  With all the talk about FHA doing what it can to help home-buyers I find this to have strange timing.  This will definitely put a lot more cash into the FHA coffers, and although it is going to impact homeowners I don’t think it will be that drastic.

Below you will find a copy of the new risk based mortgage insurance premium chart.  You can see that LTV and now Credit Score are going to play a large factor, and FHA effectively sets a minimum credit score (over 90% LTV) as a part of this announcement.  This is FHA’s first real acknowledgement of credit score after years of a stance that FHA was NOT credit score driven.  Guess what.. now it is.   The FHA Risk Based Mortgage Insurance Premiums show that FHA feels Credit Score = Risk.

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In my opinion the FHA Manufactured Home One Time Close Construction Permanent Loan is one of the most difficult transactions to put together.  It layers all of the most complex loan types imaginable you have a Construction To Permanent Loan combined with an FHA loan and then mix in Manufactured Home as the property type and I think all levels of complexity are covered.

I have been originating these loans for about 1o years and the amazing part is that once you get used to them they are very easy and very consistent.  The biggest problem is when a company jumps into this arena with no experience because there are a lot of mistakes that can be made. 

On top of this there are some discrepancies between different HUD offices on how these transactions can be handled.  The Denver HOC seems to feel that all new construction manufactured home utilize the BOL (Build on Own Land) Worksheet.  The Atlanta HOC instructs that they can be underwritten as either a BOL or a Construction to Perm Transaction.

I will get into more detail about the different types, but for the most part the Manufactured Home Construction Perm works like any other construction perm.  The borrower closes upfront on the loan and the land is paid off, once the home is set (or in some cases just constructed) it is paid off, and then the dealer can take a draw for additional expenses.  In the end the loan converts or modifies into an FHA Loan.  This conversion or modification is NOT a second closing, it just ends the construction period, sets the permanent loan rate and the permanent loan term and maturity.  The great thing is there is no re-verification once construction is complete.  The entire loan approval is based on the original closing date, and all of the original pay-stubs, bank-statements, credit report etc.

Manufactured Home Dealers benefit greatly from the FHA One Time Close Construction Loan:
1) Manufactured Home Dealers are able to shift the borrowers credit risk, no more setting a home to find out that the borrower’s score dropped or their job changed and they no longer qualify.

2) Manufactured Home Dealers are able to free up capital and floor plan lines.  By having the construction loan provide the funds the dealer frees up his capital for running his business.

I have interviewed with or worked for almost all of the major players in Manufactured Home One Time Close Construction Perms over my career.  Personally I always preferred companies where the same lender underwrites the FHA loan and Underwrites and Administers the Construction Portion and Final Funding.  If you are working with a program where these functions are split you have to be sure that all players are on the same page. 

The other important piece is to look at the companies exposure to manufactured home loans.  I am a huge advocate of manufactured housing but at the end of the day I call tell you from 10 years of experience that they are more likely to default.  If a company funds 100% of their business as manufactured housing at some point they will have problems with neighborhood watch and default rates.  Also the end investors track default rates and a company is selling 100% manufactured to their servicing lenders they will eventually get cut off.  I have seen it happen to a few companies I worked for in the past. 

I try to make sure that Manufactured Homes only make up 15% – 20% of my volume.  This helps protect the company and my dealers because we won’t run the risk of getting cut off. 

As far as qualifications for the loans they run pretty standard with FHA. A 580 is a good minimum benchmark for credit score but its not a set minimum.  It is much easier to get a loan approved over a 580, the lower scores can be  approved but require compensating factors (usually reserves and a good LTV).  In order to accommodate 100% financing a non profit gift can be used, this allows the dealer to contribute the required down payment to the borrower through the non profit gift company.   Collections don’t have to be paid off in most cases and borrowers with no credit score can be approved with alternative credit.

Manufactured Home Information:

• All manufactured homes built on or after June 15, 1976, must have an affixed HUD seal(s) located on the outside of the home indicating the house is in accordance with Federal Manufactured Construction and Safety Standards.  If the home is a multi-wide unit, each unit must have a seal.  If the tags are missing from the property, the appraiser must recommend rejection of the property and notify the lender.
• A certification of compliance with the Foundations Guide, including the licensed professional engineer’s seal and signature, is required on all manufactured homes.
• All foundation systems, new and existing, must meet the guidelines published in the Permanent Foundations Guide for Manufactured Housing, HUD-7584, dated September 1996.  A certification attesting to compliance with HUD requirements must be obtained from a licensed professional engineer and included in the insuring file.  This procedure does not apply when the current FHA borrower refinances their loan.  It is applicable for all re-sales.
• The home must have at least 400 square feet.
• The home must be built and remain on a permanent chassis.
• The home must be erected on permanent foundation designed and constructed in accordance with FHA requirements.

4155 may sound like the price of a used car but it is actually the FHA bible.  Most people in the mortgage business say it as “Fourty-One, Fifty-Five” as opposed to the Four Thousand One Hundred Fifty Five.   This is the document number assigned to the federal housing administration (FHA) handbook for single family mortgage loans.

These are the FHA Loans that are all the buzz right now in the mortgage business.  If you are a loan officer, processor or any other industry insider who is involved in FHA Loans I suggest you get a copy of the 4155 and study it.  It is THE guidebook for FHA Loans.

 When I  first got into FHA loans back in 1998 I read the 4155 word for word over and over again and it made me a much better originator.  I could quote guidelines in my sleep which gave me a huge advantage.  The 4155 is the FHA BIBLE!

We have recently found out that Taylor Bean and Whitaker is still accepting FHA loans below a 580 credit score with a manual underwrite.

There underwriting times are very slow for this reason because they are getting a lot of loans they cannot approve.  If you have an FHA loan below a 580 credit score and have plenty of time to wait, TBW (Taylor Bean) is your best bet.  I would warn you that if you are going to submit a loan below a 580 credit score you need to make sure it is processed properly! Make sure you understand FHA guidelines and are meeting them, and underwriter will be looking for a reason to decline your loan when the score is this low.  This makes it even more important to present the loan properly when the credit score is below 580 and the loan is FHA.