FHASecure: What In The World Is Going On?

Wednesday, January 16th, 2008 at 10:54 pm By Carl Pruitt

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Two issues today.

Issue Number 1: FHASecure

Personally, I have pretty much given up on FHASecure. If I find someone who miraculously actually qualifies for the program, their second mortgage holder often insanely refuses to resubordinate their lien.

It is my opinion, though, that the substantial publicity for this loan program has caused more people to look into using the FHA program after they thought they had no way to refinance their mortgage due to falling home values. There has been a real value to that. The standard FHA program already provides a solution for many. They had no other choice but FHA, but they never would have tried FHA without the publicity.

Amusingly, as often occurs in government bureaucracies headed by political appointees, HUD has seemed to be chasing their tail lately trying to put the best spin on the FHASecure program. Now, according to an article by Peter G. Miller in Realty Times, they have come up with the claim that the term FHASecure really applies to any conventional to FHA refinance! Huh? I know what I heard in the conference calls and read in the mortgagee letter, and this is definitely not what it started out as.

You can find Peter’s article at: http://realtytimes.com/rtpages/20080116_hudconfusion.htm. I encourage you to go and read it.

You can also find HUD’s Frequently Asked Questions for lenders about FHASecure at http://www.fha.gov/about/fhasindqa.cfm. You can get detailed answers to a lot of the questions you may have about the FHASecure program guidelines there.

Issue Number Two: Risk Based Mortgage Insurance

There has been a lot of discussion among the sources I read about how the FHA Modernization bill we are all pushing would shoot itself in the foot by adopting risk based mortgage insurance. I partially agree.

I have been in a state of confusion about this because HUD’s original entry in the Federal Register and even their Frequently Asked Questions page both indicate that regardless of FHA Mortgage Reform risk based mortgage insurance was to take effect on January 1, 2008. Yet it seems to have been delayed although I personally haven’t seen any official notification of the delay. I only know that I have just been told by lenders that it is business as usual. This comes from the HUD FAQ:

“In addition, why has FHA waited until now to price for risk, as do other insurers?

Since it appeared unlikely that Congress would appropriate funds for FHA to continue its operations, FHA had a choice: either raise premiums across the board for all borrowers, thereby exacerbating adverse selection, or adopt the risk-based premium structure, with existing caps, that takes effect January 1, 2008.”

Those against the risk based mortgage insurance point out a GAO study done in July 2007 which indicates that when risk based mortgage insurance rules are applied that:

“GAO’s analysis of data on 2005 FHA home purchase borrowers shows that 43 percent would have paid the same or less under the risk-based pricing proposal than they actually paid, 37 percent would have paid more, and 20 percent (those with the highest expected claim rates) would not have qualified for FHA insurance.” (emphasis added)

Obviously, it would completely ruin the effect of FHA mortgage reform if 20 percent of those who would qualify for an FHA loan won’t even be eligible any more. However, there are at least a couple of other factors at work here.

First, is the fact that we don’t know exactly how the final bill will look. The Senate version delays the implementation of the risk based mortgage insurance for a year in order to allow for more time to work on the details. I think this is prudent. So if the Senate version wins out on that issue then it won’t quite be an immediate disaster. The currently published version of the risk based mortgage insurance excludes those borrowers with no credit score from maximum financing. I would hope that the potential delay in implementation could provide time to fight that provision.

Second, according to HUD’s FAQ again:

“…because FHA’s premiums are now based on risk, it can lower the accept/refer cut point to allow a greater percentage of mortgages to receive the accept risk classification with all the associated benefits, e.g., documentation relief.” (emphasis added)

We don’t know, and GAO didn’t know when they did their study last year, what the potential effect of this change might be. I don’t know if it would make up a 20% loss or not. And, honestly … nothing personal if you are one … but I don’t trust the work of government bureaucrat accountants anyway. Government numbers rarely work out as predicted.

What I do know is that FHA foreclosure rates aren’t that bad. Check my earlier posts in the archives for more information on that. So the program doesn’t really need all that much tweaking or modernization. I hope that politics on this issue doesn’t take a good idea and turn it into a disaster. I would love to hear your comments. Just click on the link below that has the word “comments” in it.