Sunday, November 7, 2010

MORTGAGE & FINANCE: Sizing up new FHA requirements. Worries about oversight, maximum debt ratios persist.

With the housing market slumping badly after the first-time homebuyer tax credit met its final days, one would think that things couldn't get any tougher for real estate brokers over the near term.

But market participants are closely eyeing the changes from the Federal Housing Administration to gauge possible impacts.

Why should brokers worry about the FHA? The obvious answer is: The FHA insures about 30 percent of all home loans in the United States and whatever changes it makes reverberates throughout the housing market.

New FHA borrowers are required (as of Oct. 4, 2010) to have a minimum FICO score of 580 to qualify for the minimum 3.5 percent downpayment. New borrowers with a FICO score between 500-579 must now put down at least a 10 percent downpayment, and those with FICO scores below 500 can't qualify.

I spoke to Gibran Nicholas, chairman of the CMPS Institute, an Ann Arbor, Mich.-based organization that trains and certifies mortgage bankers and brokers, and he's OK with this change.

"Based on HUD statistics, less than 2 percent of all borrowers who use the FHA loans have credit scores of less than 580, but at the same time this 2 percent of the market has a 27 percent default rate," Nicholas said. "These people more than likely shouldn't be in homes because they can't really afford them in the first place."

Also, upfront premiums for FHA mortgage insurance were reduced from 2.25 percent to 1 percent in the recent changes, while the statutory limit on annual premiums rose from 0.55 percent to 1.55 percent.

Those FHA borrowers with loan-to-value ratios of up to 95 percent will see an increase in annual premiums to 0.85 percent, and those with higher LTVs will see annual premiums rise to 0.9 percent.

Scott Medsger, senior loan officer with Hometrust Mortgage in Webster, Texas, said he doesn't mind if the FHA makes changes, as long as it concerns the right oversight. He worries that is not the case.

"The one thing that strikes me as absolutely ridiculous is that the FHA is still missing the boat," he said with vehemence. "With all these changes about trying to strengthen credit requirements for all types of mortgages files, they are still letting these high-debt ratios go on. It's asinine."

What's bugging Medsger is the fact that a borrower can still get a mortgage loan with a debt ratio as high as 55 percent of gross monthly income.

"Let's say, for example, that someone makes $5,000 a month gross," he explained. "That's not net, so realistically they are bringing home $3,500 a month. They can get approved to a total debt loan of $2,750 a month, which leaves them $750 a month to live on, including groceries, electrical bills, other utilities, kids' stuff, etc. That's not a whole lot of money to live on for a family of four."

In the early 1990s, before the advent of automated underwriting, the maximum debt ratio was 41 percent on an FHA loan, which Medsger believes was already a stretch for a lot of homeowning families. Back then the FHA was stricter -- if you had even a 44 percent debt ratio, you weren't going to get a loan.

Medsger is willing to concede that some borrowers can manage with high debt ratios because of financial independence.

"There are certain cases," he said. "But, in most cases, an individual who has a 620 credit score should not be allowed a 50 percent debt ratio. Yet, by FHA standards, that's allowable."

The FHA fund has fallen so low that the government entity is running through a number of alternative plans to increase credit quality, reduce default rates and to not have to go begging to Congress for money.

Maybe, the FHA just needs to run smarter.

Steve Bergsman Inman News October 21, 2010

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