Loan Modification

Will new rules increase dependency on FHA even more?!

By Gina Pogol

Much of mortgage reform centers on changes to risk retention for mortgage lenders. It makes sense that if the fact that those responsible for lax underwriting and silly products were able to leave investors and homeowners and taxpayers holding the bag last time around, requiring them to remain on the hook when they make risky loans is a good idea, right?

Unfortunately, many analysts feel that upcoming changes to risk-retention rules  could increase the cost of mortgages for a great many people and make FHA forever a honking huge fixture of the American mortgage landscape.

Under the Dodd-Frank act, lenders will be required to retain capital reserves equal to five percent of all but the safest mortgage they originate.  The safe loans to be exempted from this risk retention are called “qualified residential mortgages” or QRMs. Rumors bounding round the Hill say that in order to be designated a QRM, a mortgage will max out at 80% of the home’s value or purchase price.  This means that those that do not have a down payment of at least 20% will be subject to increased mortgage rates in addition to private mortgage insurance to make up for the risk retention on the part of the lender.  The Treasury, the Federal Reserve, the FDIC, the FHA, and other regulatory and governmental agencies are responsible for defining a QRM.

The exception to the QRM rule is that if a loans is issued or guaranteed through government agencies it is exempt from the rule. As it says here:

??(G) provide for???(i) a total or partial exemption of any securitization, as may be appropriate in the public interest and for the protection of investors;
??(ii) a total or partial exemption for the securitization of an asset issued or guaranteed by the United States, or an agency of the United States, as the Federal banking agencies and the Commission jointly determine appropriate in the public interest and for the protection of investors, except that, for purposes of this clause, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are not agencies of the United States;
??(iii) a total or partial exemption for any assetbacked security that is a security issued or guaranteed by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of a State or territory that is exempt from the registration requirements of the Securities Act of 1933 by reason of section 3(a)(2) of that Act (15 U.S.C. 77c(a)(2)), or a security defined as a qualified scholarship funding bond in section 150(d)(2) of the Internal Revenue Code of 1986, as may be appropriate in the public interest and for the protection of investors; and
??(iv) the allocation of risk retention obligations between a securitizer and an originator in the case of a securitizer that purchases assets from an originator, as the Federal banking agencies and the Commission jointly determine appropriate.

As FHA mortgages would be exempt from QRM,you can see that demand for them will likely become even more skewed toward these loans than it already is as a result of the rule change.   FHA only requires a down payment of 3.5% (10% for those with lower credit scores) but folks with less than 20 percent down may well choose an FHA mortgage in order to avoid higher mortgage rates resulting from the risk-retention requirements, depending on how those loans — with their private mortgage insurance and risk-based pricing adjustments added to QRM premiums — stack up against FHA mortgage pricing. Lately, though, even without the QRM differential, FHA mortgages are on average cheaper than conventional loans.

This change could put the FHA in a tough spot as it is already under-capitalized and was never meant to insure the volume of loans that it does these days.  The VA and USDA could also see increased loan origination volume, putting a taxpayers in the mortgage business more than ever.

Full post as published by FHA Mortgage Guide on March 07, 2011 (boomark / email).