The Housing and Economic Recovery Act of 2008 goes into effect on October 1, 2008. As part of this Act, Congress placed a one year moratorium on risk based mortgage insurance premiums on FHA loans.
Under the risk based premium structure that HUD put into effect on July 14, 2008, borrowers with better credit and lower loan to value mortgages are able to pay lower rates while riskier loans carry higher insurance rates. A perfectly sensible system that FHA statistics show may actually be a major benefit to lower income borrowers since this members of this group with FHA loans have been shown to have higher credit scores on FHA loans.
As part of what may be a little bit of political gamesmanship on the part of HUD, HUD has just announced a new mortgage insurance premium structure to take effect on October 1, 2008. Here are the details:
Upfront Mortgage Insurance Premiums
Purchase Money Mortgages and Full-Credit Qualifying Refinances = 1.75 Percent
Streamline Refinances (all types) = 1.50 Percent
FHASecure (Delinquent Mortgagors) = 3.00 Percent
Annual Insurance Premiums (paid monthly)
On 30 year loans with LTV > 95 %, annual mortgage insurance will be .55%
On 30 year loans with LTV < 95%, annual mortgage insurance will be .50%
On FHA Secure loans with LTV > 95%, annual mortgage insurance will be .55%
On FHA Secure loans with LTV < 95%, annual mortgage insurance will be .50%
On 15 year loans with LTV > 90%, annual mortgage insurance will be .25%
On 15 year loans with LTV < 90%, annual mortgage insurance will not be required
These premium changes apply to the folllowing FHA loan programs: 203b (standard 1-4 unit property), 203k (rehab loan), and 234c (condominiums) but they do not apply to FHA reverse mortgages.
Mortgages with FHA case number assignments made on July 14, 2008, through and including September 30,2008, shall maintain the risk-based premium structure for the life of the mortgage.
HUD promises to let us know what they plan to do at the end of the moratorium, but keep your eye on the legislation being pushed that restores seller paid down payment assistance programs. This legislation includes risk based mortgage insurance premiums.
There is a great conversation going on about a Friday, August 21, 2008 post over on the Blown Mortgage blog regarding seller funded down payment assistance programs. I encourage everyone to go and take a look at it before reading the rest of this column. The conversation is centered around a guest post by Josh Lewis entitled “RIP FHA Down Payment Assistance Programs, Not So Fast“.
As I expected would occur on a blog which keeps a necessary sharp eye on the dirty underbelly of the mortgage business, most of the commenters disagree with Mr. Lewis’ opinion that down payment assistance programs should be saved.
In truth, I too think that some of Mr. Lewis’ numbers are a bit off, but the discussion highlights an issue I have written about repeatedly on this site. Namely, that the statistics being cited by those who oppose down payment assistance are at best useless, while most people completely miss the point on why down payment assistance programs should be saved and thus how to solve some of the problems.
In the column Mr. Lewis basically makes the point that loans utilizing down payment assistance comprise a significant portion of the total FHA loans being insured and thus getting rid of the program, which has helped so many while the economy is in a downturn, will be a “punch in the gut” to the housing market while it is already down.
The disagreeing commenters throw up the usual arguments about the higher default rates associated with down payment assistance programs as they are implemented now, along with the classic “skin in the game” argument that those who put some money into the transaction will not default. Again, I encourage you to go and take a look at the post if you haven’t already.
Interestingly, one of the commenters brings up an excellent, although potentially confusing, post on Calculated Risk entitled “Default Statistics, Or Mortgage Math Is Hard” which explores the nature of mortgage statistics.
Although this was not its intended purpose, the Calculated Risk post cited above successfully supports something I have been arguing for some time now. Most mortgage analysis above the level of the individual underwriting of files is based on such an incomplete set of facts that the conclusions are practically worthless. For evidence of this I’ll cite the whole mortgage/credit crisis we’re in right now in spite of the best efforts of all the wise and wonderful credit analysts.
To say that down payment assistance programs are “associated with defaults” is not the same thing as saying DAPs are the cause of those defaults. Those opposed to the DAPs compare the default rates on loans without seller assisted down payments to those that did include assistance as evidence to show that causality. I mean, it makes sense that if those other loans made at the same time had a lower default rate, then the seller assisted down payment is the only difference, doesn’t it? Unfortunately, that is not the case. There are countless other differences that haven’t been taken into account. Most significantly - mortgage fraud. But there is more.
The theory has always been that FHA underwriting was supposed to be “common sense” underwriting. With the advent of automated underwriting, some lenders have deviated from this standard quite a bit.
I personally have had many years of FHA experience both with and without down payment assistance. (By the way, I was just as successful before down payment assistance programs and with a near 5% down payment requirement for FHA loans as with a 3% down payment which came out of the sales price. My defense of down payment assistance has nothing to do with my wallet.) My own personal observation is that most of the defaults can be associated just as strongly with lax underwriting standards in other areas such as debt ratios, job stability, length of rental history as they can be with DAPs. These other items don’t make it into the analysis beyond a few studies that attempt to work in the credit score as a factor.
If a loan goes through automated underwriting with down payment assistance, a 50% debt ratio, and no previous history of even paying rent, I’m not going to agree that having the borrower putting down their own measly 3% down payment would stop a foreclosure when that borrower gets laid off and takes a month to find a new job. Many loans like this were made over the past few years and the defaults will get blamed on seller assisted down payment programs.
Does it not make common sense that a loan which is deficient in one aspect should be required to have extra strength in another? For example, when a borrower needs down payment assistance should they also be allowed to have a payment at the maximum allowed debt ratio? If they default, which factor caused it?
As one of the commenters noted, would we even be worrying about this if there weren’t so many other problems with the economy that are causing defaults among all types of borrowers?
FHA exists in order to provide mortgage alternatives to those borrowers who are too risky for the conventional mortgage world. Given the nature and objectives of the FHA program, is it the best policy to throw the baby with the bath water in order to make it a completely “safe” program if there is a better alternative?
Most people aren’t aware that the default statistics of all FHA lenders, including each individual mortgage broker office which participates, are monitored and lenders whose default statistics are too high are supposed to be dropped from the program. By default, I am referring to the very earliest sign of a problem - late payments. Maybe if the political appointees at HUD put a little more energy into enforcing that policy and thereby pushing lenders to use common sense when originating mortgages, we wouldn’t even be having this discussion.
As most know, the “Housing and Economic Recovery Act of 2008” which has been passed and signed into law to take effect in October, bans seller assisted down payment programs such as the Nehemiah, Ameridream, Futures Home Assistance. In my opinion, this drastic overreaction is the result of political pressure and some doubtful statistics. I have written about it several times elsewhere on this site. Scott Syphax, President and CEO of Nehemiah Corporation of North America pointed out the most significant of the problems with these statistics in an editorial reply in the Sacramento Bee on Sunday. In it, Mr. Syphax pointed out:
“Research would have shown that data used by FHA and the Government Accountability Office comes from a data warehouse that the U.S. Department of Housing and Urban Development’s own inspector general cited as unreliable. In short, FHA undercounts the number of DPA loans by up to three times and divides that number into the number of claims it pays.”
