Loan Modification

FHA Loans: Commissioner Nixes Higher Minimum Credit Scores, Risk Based Pricing

By Karen Lawson

FHA Commissioner David Stevens indicates that the agency has no plans for increasing minimum credit scores from 580 to an estimated minimum of 620), and will not engage in risk based pricing, which would charge riskier borrowers more for getting an FHA mortgage loan.

FHA Plays “Counter-Cyclical Role” in Mortgage Market

The commissioner described FHA as playing a counter cyclical role in US housing and mortgage markets. FHA provides loans when private lenders have pulled back due to concerns over credit and potential risks. In a recent address to a group of Colorado mortgage brokers, Stevens suggested  that without government underwriting in the current difficult credit environment, mortgage lending could disappear. Fannie Mae, Freddie Mac, and FHA  account for 95% or more of new home loans in the US. Of particular concern to FHA is its commitment to serving communities and borrowers who cannot qualify for conventional mortgage financing. FHA provides borrowers with marginal and non traditional credit, and those with moderate income their only viable opportunity for qualifying for mortgage loans in today’s tight credit environment. Stevens cited the stabilizing influence of the government’s participation in mortgage lending as central to the nation’s housing recovery.

FHA also plays a critical role in assisting borrowers wishing to refinance to lower mortgage rates, but who cannot qualify through conventional lending due to loss in property value. Reducing mortgage rates provides lower monthly payment and can help struggling families stabilize their finances.

FHA and Public Policy: Who Gets to Own a Home

FHA is facing the “next wave” of mortgage foreclosures in 2010-2011; this is the result of its rapid growth and inability  to effectively monitor mortgage lenders in the wake of the collapse of sub prime lending.  Coupled with less than mandatory reserves for paying claims for defaulted mortgage loans, this is causing legislators to question whether FHA should up the ante on its lending requirements at the expense of potential borrowers who cannot meet higher underwriting standards. Although it’s true that many people aren’t financially prepared for owning a home, should we eliminate hard working Americans who cannot afford a 10 or 20% down payment, but who have decent credit and steady employment  from owning homes?

The FHA Commissioner reaffirms the agency’s role in helping under served buyers and homeowners seeking refinance mortgage loans, and claimed that risk based pricing is not an option for FHA mortgage loan programs, as it would adversely impact under served communities.

Cyclical Trends: When Conditions Improve, Will FHA Role Decrease?

As real estate markets and employment levels improve, the theory goes that conventional  mortgage lenders will be exposed to less risk, and therefore may loosen credit criteria as default levels fall. Unfortunately, we have no guarantees, and it seems likely that FHA loan programs will continue providing a safety net for borrowers who otherwise cannot qualify for mortgage loans and refinancing options.

Full post as published by FHA Mortgage Guide on March 16, 2010 (boomark / email).