CAAR Blog

FHA last week announced major underwriting changes to strengthen its reserves while maintaining the agency’s critical position in the mortgage market at a time when its federally backed loans comprise about 40 percent of the market. Among the changes: an increase in the up-front mortgage insurance premium by 50 bps to 2.25 percent; a FICO credit score floor of 580 for borrowers to qualify for the agency’s 3.5 percent minimum down payment (other borrowers must put down a 10 percent minimum); and a reduction in seller concessions from 6 percent to 3 percent of the mortgage amount. Access NAR’s brief on FHA credit issues. Separately, the increase in the FHA up-front mortgage insurance premium and efforts to heighten enforcement against bad lenders are fleshed out in Mortgagee Letter 2010-02 and Mortgagee Letter 2010-03, respectively.

IRS Releases New Forms, Instructions

The IRS has released IR-2010-006 providing a revised Form 5405 to reflect the changes to the tax credit made in the extension and expansion legislation enacted in November 2009. The release reminds taxpayers that all tax returns claiming the tax credit must be filed manually (i.e., they cannot utilize the IRS E-File automatic system). The revised form includes a section for those repeat buyers who are eligible to claim the $6500 tax credit. The HUD-1 or evidence of the transaction must be filed with all returns claiming the credit (both the $8000 and $6500 credits). Individuals who claim the repeat buyer credit must also provide evidence that they have owned and used the prior residence for 5 consecutive years. The instructions indicate that property tax or homeowners insurance records are sufficient for this purpose.
IRS release, instructions, and forms >
The Home Buyer Tax Credit >

FHA Announces Policy Enhancements to Better Manage Risk

On January 20, 2010, the Federal Housing Administration (FHA) announced major changes to ensure its long-term financial soundness. NAR has met with the FHA Commissioner on several occasions to discuss the state of the housing market and to underscore FHA’s invaluable role. By all accounts the new changes are a victory for home buyers. FHA has carefully balanced the need to make financial reforms with the need to keep FHA available to a large segment of consumers. This is evident by retaining the 3.5 percent minimum down payment requirement and allowing the upfront mortgage insurance premium to be financed.
FHA announced changes in the following areas: 1) The upfront mortgage insurance premium (UFMIP) will increase but may be financed; 2) Borrowers with a credit score below 580 will be required to have at least a 10 percent down payment, however, the minimum down payment will remain at 3.5 percent for all other borrowers; 3) FHA will seek legislative authority to increase the annual premium (currently capped at .55 percent); and 4) Seller concessions will be reduced to 3 percent from 6 percent.
On January 21, 2010, FHA released Mortgagee Letter 2010-02 and 2010-03, which provide details on the UFMIP increase and new procedures for terminating lenders underwriting authority for FHA insured mortgages. The UFMIP increased to 2.25 percent up from 1.75 percent for purchase mortgages and streamline refinances. ML 2010-03 states that HUD will review defaults and claims of approved lenders every 3 months. Lenders will be evaluated based on their default rate within the geographic area served by a HUD office and a default rate that also exceeds the national rate.
NAR Regulatory Issues Brief >
HUD Announcement on Policy Changes to Address Risk and Strengthen Finances >
Mortgagee Letter 2010-02: Increase in Upfront Premium for FHA Mortgage Insurance >
Mortgagee Letter 2010-03: Extended Procedures for Terminating Underwriting Authority >

In October 2009, FHA announced that its capital reserve fund had fallen below the congressionally mandated level of 2 percent. The drop in capital reserves has led Congress and the Administration to call for changes to strengthen FHA.

The  week  of  January  18,  2010, FHA will announce major changes to ensure its long-term financial soundness.  FHA is trying to balance three fundamental objectives: 1) financial soundness – ensuring that its capital ratio returns above 2 percent, 2) fulfilling its mission of serving borrowers not adequately served by the private sector  and 3) facilitating the recovery of the housing industry and the over-all economy.

NAR  has  met with the Commissioner on several occasions to discuss the state of the housing market and to underscore FHA’s invaluable role. In looking for solutions to FHA’s financial concerns, replenishing the insurance fund and lowering loan-to-value ratios have the most significant impact on the FHA’s actuarial soundness.  We expect changes in the following areas:

Improve FHA loan quality:
Increasing “upfront cash” that a borrower has to bring to the table by:
      Eliminating the ability to finance the upfront premium
      Increase the cash investment required above 3.5 percent by:
         o  Reduce seller concessions from 6 percent to as low as 3 percent
         o  Impose a minimum FICO score
      Down payment requirement will remain at 3.5 percent
      Impose a loan-to-value (LTV) maximum ratio by FICO score

Increase the Mortgage Insurance Premiums:
FHA can increase the MIP as follows:
      Up-front premium may be raised to 2-2.25 percent, up from 1.75 percent
      Higher premiums may be introduced for certain FHA products (such as refinance transactions)

FHA Lender Eligibility Changes
FHA is requiring significant changes for lenders.  Many changes recommended were published as a proposed rule on lender eligibility changes in late November.  Final rule has not yet been published. There are several proposed changes for FHA lenders:
      Elimination of loan correspondent approval process
      Increase net worth requirements of lenders to $2.5 million over the next 3 years
      Lenders will be required to have a net worth of $1 million within one year, of which 20 percent must be liquid assets
      Implementation of Credit Watch for underwriting lenders to monitor defaults and claims
      Codification of Mortgagee Letter 2009-31, which places additional requirements on FHA lenders

Risk Management Improvements
FHA will be overhauling its approach to risk management throughout 2010. FHA will likely begin targeting early payment defaults for reviews and loans that result in claims in the first couple of years.

Risk Management Improvements (Continued) This change will likely increase indemnification requests since FHA will be targeting their reviews on early payment defaults (i.e. loans with potential problems).

FHA will be highlighting “poor performing” lenders more prominently on their website and in press releases. This started in January when FHA and the HUD Inspector General announced subpoenas to 15 mortgage companies demanding data and documentation on failed loans.

The Commissioner has frequently discussed the development of a Lender Scorecard, which is expected in the near future.

FHA Budget Proposals (Requires Legislation) As part of the Administration’s FY 2011 budget proposal there will be several FHA legislative initiatives. They could include:
      Increase the current cap for annual premiums, currently at .55 percent (FHA has said that raising the annual premium is the “most effective means of raising capital for the fund w/ least impact per borrower”)
      Obtain  a legislative change to Credit Watch to facilitate the suspension of an FHA lender’s entire operation not just individual branches
      Increased accountability of FHA lenders for fraud or misrepresentation

These changes will require congressional action, the timetable for enacting and implementing any legislation is subject to the Congressional schedule.

Conclusion
FHA  will  be transformed over the next few years. The changes outlined above are the beginning of the process with additional changes expected during the tenure of FHA Commissioner Dave Stevens. Going forward, FHA will continually evaluate programmatic changes and will likely withdraw them when the capital ratio returns above 2 percent. However, it is unlikely FHA will relax risk management and lender monitoring enhancements.

 
You can better understand temporary FHA condo rules released a few weeks ago through FAQs the agency has released. The temporary rules ease concentration and owner-occupancy requirements and make changes to pre-sale rules and to the agency’s spot loan approval process.

Commercial real estate will see negative absorption, higher vacancies, and declining rents, NAR’s latest commercial analysis shows. Financing still poses the main challenge to stabilization. The market for commercial mortgage-backed securities (CMBS) has improved, but volume is insufficient to match maturing debt. Read more in an NAR Research commentary.

 
Short sale procedures for loan servicers are standardized in guidelines released earlier this week under the federal government’s Making Home Affordable loan modification initiative for troubled home owners. The guidelines create a path for a short-sale or deed-in-lieu of foreclosure for eligible borrowers for whom loan modification isn’t a viable option. The guidelines provide $1,500 in federal funds to help borrowers relocate, $1,000 to help servicers offset their  processing costs, and up to $1,000 to investors to secure release of subordinate liens. For each $3 an investor pays to secure the release of a lien, the investor receives $1 in assistance. The guidelines prohibit a reduction in agreed-upon commissions (if they’re not more than 6 percent) and take effect April 5, 2010, but can be implemented by servicers at any time. Fannie Mae and Freddie Mac are expected to follow this release with their own rules based on these guidelines. Read an NAR summary. Read the entire guidelines. The guidelines will be covered as part of a Webinar next week, Today’s Changing Short Sales Environment.

Fannie Mae is tightening its underwriting criteria by raising the minimum credit score for automated underwriting (Desktop Underwriter) from 580 to at least 620 for all loans, justified on the grounds that this action “will support prudent risk management and better ensure sustainable homeownership.” Even higher minimum credit scores may apply for both manual and automated underwriting, depending on factors such as the loan-to-value ratio and the number of units in the structure. The minimum credit score applies to all mortgage loans delivered to Fannie Mae, including FHA and other government-backed loans. Fannie is also changing the maximum debt-to-income ratio for Desktop Underwriter to 45 percent, but will allow 50 percent if there are “strong compensating factors.” Other changes are also being made, as described in relevant Fannie documents (see below).
The new Desktop Underwriter Version 8.0, including the new underwriting criteria, takes effect the weekend of December 12, 2009. The revised minimum credit scores are already in effect for manual underwriting.

This news was a little lost in the shuffle of excitement of the home-buyer tax credit being extended. This is very good news for the higher-end of the real estate market.

Legislation extending temporary FHA, Freddie Mac, and Fannie Mae loan limits was signed into law last week as part of a “continuing resolution” budget bill. The loan limits, set at 125 percent of local area home prices and capped at $729,750, are extended until Dec. 31, 2010. The loan limits were set to expire at the end of 2009 and would have dropped significantly, making mortgage financing harder to get for more borrowers at a time when housing sales are showing signs of recovery. “These higher loan limits will help motivate qualified home buyers to purchase in high-cost markets,” says NAR President Charles McMillan in a statement thanking Congress for its quick action

The U.S. Senate voted yesterday to extend unemployment benefits for 14 more weeks (20 weeks in states with very high unemployment rates), which would impact more than 1 million Americans scheduled to lose their unemployment benefits in the next few weeks. In that same bill (S.A. 2712), the Senate also approved extending the first-time homebuyer tax credit through April 30, 2010 (as long as they have a ratified contract, they have until June 30th to close) and adding a provision that move-up homebuyers who have been in their homes for five years or more can earn a $6500 tax credit as well. There are a few more provisions, so click the link below to see the write-up from Senator Patty Murray’s office (D-WA), a co-sponsor of the bill. 

The House is expected to vote on the bill this afternoon, which hopefully means it will get to the President for signature on Friday. 

http://murray.senate.gov/housing/homebuyer.pdf

FHA Announces Flood Zone Requirements for Appraisers

The Federal Housing Administration released Mortgagee Letter 2009-37, which addresses appraiser and mortgagee responsibilities for FHA mortgages in flood zones. Appraisers are required to review the applicable FEMA Flood Insurance Rate Map (FIRM). If the property is in flood zone the appraiser is required to include a flood map with the appraisal report. The appraiser must also enter the FEMA zone designation on the report form and identify the map panel number and map date. The mortgagee letter notes that the final responsibility for determining if a property is located in a Special Flood Hazard Area (SFHA) rests with the originating lender.
Mortgagee Letter 2009-37: Flood Zone Requirements and Responsibilities of FHA Mortgagees and Appraisers >

FHA Announces Appraisal Performance Standards and Sanctions

The Federal Housing Administration (FHA) released Mortgagee Letter 2009-41 on appraiser performance and sanctions. This is largely a reminder of administrative sanctions that FHA may take ranging from a Notice of Deficiency (lowest level sanction) to civil or criminal sanctions (most severe). Appraisers are reminded that they must conform to FHA appraisal requirements and USPAP. An appraisal review is always conducted by the underwriter and compliance monitoring reviews of appraisals are routinely conducted by FHA staff reviewers. Lenders are reminded that they are responsible, with the appraiser, for the quality and accuracy of the appraisal if the lender knew or should have known that there were problems with the appraisal.
Mortgagee Letter 2009-41: Appraisal Performance Standards and Sanctions >

FHA Announces Hope for Homeowners Comprehensive Guidance

On October 20, 2009, the Federal Housing Administration (FHA) released ML 2009-43 providing comprehensive guidance on the Hope for Homeowners Program (H4H). The H4H program allows homeowners of single family, owner-occupied units to refinance into an affordable FHA-insured, 30 year, fixed-rate mortgage and is effective for all endorsements on or before September 30, 2011. Borrowers are eligible if they have not intentionally defaulted on a mortgage or other substantial debt in the last five years and if at least six full payments have been made on a delinquent mortgage. Borrowers must reside in the property securing the refinanced loan and may not have a net worth of more than $1,000,000. Borrowers in bankruptcy are not precluded from participating in the program.

Any type of mortgage is eligible for refinancing under the H4H Program, however, the primary mortgage holder must agree to waive all prepayment and late fees, agree to accept proceeds of H4H mortgage as payment in full, and release any outstanding mortgage liens. The refinance must include an appraisal conducted by an appraiser on the FHA Appraiser Roster and must be conducted using FHA guidelines. The Upfront Mortgage Insurance Premium (UFMIP) is 2.00 percent of the loan amount and the annual premium is .75 percent. The maximum loan-to-value (LTV) ratio on the new H4H mortgage is 105 percent of the current appraised value (excluding UFMIP). For borrowers with a credit score below 500 the maximum LTV is 90 percent of the current appraised value.
Mortgagee Letter 2009-43: Hope for Homeowners Program – Comprehensive Guidance >
ML 2009-43 Exhibit A >
ML 2009-43 Exhibit B >
ML 2009-43 Exhibit C >
ML 2009-43 Exhibit D >