New FHA collections rule impacts homebuilders, not Ginnie Mae
A new rule prohibiting homebuyers from getting a Federal Housing Administration mortgage if they owe more than $1,000 in outstanding collections accounts could cut demand by up to 20%, according to banking analysts.
The rule went into effect April 1. If a borrower enters into a payment plan on these accounts, then an exemption could be granted. Also, the FHA clarified the rule this week, stating if a borrower documents the collections account stems from a "life event" such as a medical bill, divorce or loss of employment, he or she could still qualify for the loan.
"FHA's recent clarification on the rule represents only a modest softening, in our view," said JPMorgan Chase (JPM) analysts in a note Thursday. "We believe borrowers having outstanding collections in one arena also likely have outstanding collections in other areas."
Chase analysts estimate this rule should negatively impact roughly 10% to 20% of demand for the FHA universe over the next two to three months.
On the secondary side, Ginnie Mae, which issues securities containing FHA loans, does not expect much of a change.
"Ginnie Mae is not concerned about the impact of the rule on our issuance levels," a spokesperson for the agency said.
Ginnie issued roughly $350 billion in MBS last year, down from $362 billion in 2010, according to its data reports.
While the financing side appears ready to remain, Chase analysts said the rule impacts homebuilders.
They expect it to impact between 30% and 40% of first-time homebuyers considering an FHA loan. Builder exposure to first-time homebuyers ranges widely. It can be as low as 25% and as high as KB Homes (KBH), which has 65% of its business linked to first-time homebuyers, according to Chase.
More than half of KB Homes business is also tied to FHA mortgages.
"While some public builders have either not quantified the potential impact from the new FHA rules or have viewed it as immaterial — we believe due to these rules only being effective as of April 1 and it being fairly difficult to quantify this issue — at the same time, several private builders pointed to a material portion of their first- time homebuyer business as being negatively impacted," Chase said.
The timing is also peculiar, and analysts expect this rule could cramp upcoming home sale data throughout the spring.
"It just seems very strange that they would do this in the midst of the selling season," according to an analyst at another financial institution.