Tuesday may prove to be a banner day for expanding credit access. First, Federal Housing Finance Agency Director Mel Watt named maintaining credit availability as one of his main goals for the FHFA and the GSEs.
And now the Federal Housing Administration has released its “Blueprint for Access” which outlines the additional steps the agency is taking to expand credit access for “underserved borrowers.”
In the Blueprint for Access, the FHA announced that it is launching a pilot program called Homeowners Armed with Knowledge, or HAWK for short, that further incorporates housing counseling into the home-buying process for borrowers using FHA-insured financing.
Under the HAWK program, homebuyers will qualify for savings on their FHA-insured loans by completing HUD-approved housing counseling provided by independent nonprofit organizations. The FHA said that the counseling is designed to help buyers understand the rights and responsibilities of homeownership and to improve buyers’ budgeting skills and housing decisions.
The FHA also announced more information on its Quality Assurance Initiative, which is intended to provide clarity and transparency to FHA-approved lenders.
“We want to work with lenders to provide clarity and transparency in FHA’s policies to encourage lending to qualified borrowers across the credit spectrum,” the FHA said. “We believe changing the way in which we provide policy direction and monitor lender compliance and performance better protects FHA and reduces uncertainty for lenders in their interactions with HUD.”
The FHA hopes that good quality assurance will help lenders know that their mortgages meet FHA standards, so the lenders can originate loans with confidence. The FHA notes that some lenders are adding credit overlays to loans out of fear of back-end enforcement, which restricts who can qualify for a FHA mortgage. It hopes these new practices will ease those fears.
To accomplish this, the FHA will focus on four areas:
1. Clarifying policy, which it will accomplish by releasing additional sections of its handbook this year. Throughout 2014, the FHA will publish several other sections of the handbook, including Doing Business with FHA, Oversight and Compliance, guidance for Appraisers, Condominium policies, and Servicing.
2. Enhancing its approach to assessing loan quality. The FHA is developing a new methodology for evaluating underwriting defects. The new criteria will be more descriptive, identifying a limited number of specific defects, their related causes, and levels of severity. Categorizing loan defect severity levels simplifies the compliance process as it allows lenders to better assess the risk posed by a specific deficiency.
3. Sampling a larger variety of loans. Currently, the FHA primarily selects higher-risk loans for review, i.e. loans evidencing payment challenges. The FHA acknowledges that this risk-based approach does not accurately reflect a lender's overall underwriting quality as it is primarily focused on non-performing loans. Going forward, it plans to expand our evaluation of loans to include random sampling of performing loans closer to the time of endorsement.
4. Supplementing its lender performance metrics. The FHA currently calculates a Lender Compare Ratio for all lenders. This ratio is geographically based, comparing the rate of early defaults and claims for single-family loans in a geographic area to other mortgagees in the same area. The FHA plans to introduce an additional national lender performance metric. This new Supplemental Performance Metric will assess lender performance based on the lender’s default rate within three credit score bands and compare it to an FHA target rate, rather than to the lender’s peers.
“This is a win for families, FHA, lenders, realtors and the overall market, which is why we are very excited about its potential impact," said Shaun Donovan, Secretary, U.S. Department of Housing and Urban Development. “We want to create an environment that encourages responsible behavior and provides clear rules of the road so lenders can originate loans without fear of unanticipated consequences. We want lenders to be able focus on the quality of their processes and lend to all qualified borrowers.”
Under the four-year HAWK pilot program, homebuyers who commit to housing counseling will qualify for tangible savings on their FHA-insured loans. The average buyer would save approximately $325 a year, or almost $9,800 over the life of their loan.
The homebuyer can earn these savings by completing housing counseling before signing a contract to purchase a home. If the buyer completes the counseling, they will receive a 50 basis point reduction in the upfront FHA mortgage insurance premium and a 10 basis point reduction in the annual FHA MIP.
If the buyer also chooses to participate in post-closing counseling and displays a track record of timely mortgage payments, it will bring even greater benefits. Under the program, participants would receive an additional 15 basis point reduction in annual MIP after two years with no serious delinquencies.
“FHA’s mission is to make sure that there is access to affordable mortgage credit for underserved borrowers and communities,” said Carol Galante, FHA commissioner. “Our blueprint to expand credit access outlines the steps we are taking over the next few months to make that happen. These programs transform the way we do business, make us a better partner, and help reduce risk across the market.”
The FHA's announcement was heralded as a postive by Steve Brown, the president of the National Association of Realtors. “HAWK is a step in the right direction, making mortgage credit available to more qualified homebuyers. Realtors urge FHA to quickly develop the program and make it available to homebuyers,” Brown said Tuesday at the Realtor Party Convention and Trade Expo. “We have many qualified homebuyers who need help now, and are being shut out of the market due to record high annual premiums and mortgage insurance for the life of the loan.”