BarCap Expects 'Little Bite' from FHA Underwriting Changes
Recently-announced underwriting changes to the Federal Housing Administration's (FHA) mortgage insurance program might be "all bark, little bite" according to commentary Thursday by Barclays Capital (BarCap) researchers. The FHA changes include increases in the mortgage insurance premium, increased downpayment for low FICO borrowers, reduced ability to roll closing costs into the loan and increased lender recourse to FHA lenders. “These changes are overdue,” FHA commissioner David Stevens said in a press call, adding the changes should be “significant but not overwhelming” to the lending industry. A mortgagee letter facilitating the change is now out, directing that FHA loans with case numbers assigned as of April 5, 2010, will be charged an upfront mortgage insurance premium of 2.25%. This applies to all mortgages insured under FHA's single-family insurance programs, except for home equity conversion mortgages and Hope for Homeowners loans. Absent from the overhaul was the establishment of a minimum FICO score or a higher minimum downpayment than the current 3.5%, BarCap noted. The moderate changes should not lead to any significant reduction in either Ginnie Mae prepayment rates or issuance of securities backed by FHA-insured mortgages, researchers said. "Overall, the changes announced to FHA underwriting seem to be less restrictive than anticipated, and, in our view, reflect the conscious decision of the FHA to support mortgage credit availability and the housing market at the expense of minimizing losses to the MI fund," BarCap said. The higher downpayment requirement of 10% for borrowers with FICO less than 580 doesn't look likely to affect a great portion of FHA borrowers, as researchers note only 0.5% of recent FHA purchase loans were given to borrowers with less than 580 FICO (illustrated below), indicating the change may be overall "inconsequential": FHA is touting initiatives to step up enforcement of FHA standards on lenders and ultimately hold lenders more responsible for loans they originate. BarCap notes, however, that Fannie Mae (FNM) and Freddie Mac (FRE) loan repurchases by banks has picked up significantly toward the end of 2009 (illustrated below), causing lenders to tighten credit standards on new government-sponsored enterprises (GSE) originations: "In our view, repurchase risk has already caused large originators to tighten their underwriting across their lending platforms, including FHA lending," BarCap researchers said. "Consequently, it seems that a lot of the tightening for FHA lending has already occurred." The FHA also reduced the portion of the house price a seller can provide homebuyers at closing, from 6% to 3%. It will limit more "egregious" cases of sellers providing upfront assistance and inflating the sales price of the house, while still allowing the practice of seller concessions, BarCap said. Another seller assistance program, the seller-funded down payment assistance program, was terminated over concerns house prices were inflated by sellers that donated to nonprofits, which in turn gave down payment assistance to low-income borrowers to use as a down payment on an FHA loan. Recent moves to restart this program have encountered resistance from FHA as it seeks to strengthen the capital standing of its mortgage insurance program. Write to Diana Golobay. Disclaimer: the author holds no relevant investment positions.