Loan Modification

Will FHA loans become harder to get? Probably

By Gina Pogol

On October 8th, HUD released a letter detailing proposed changes in order to shift more risk from FHA to its approved lenders. Under the changed rules, loans that are not underwritten in accordance with FHA guidelines will not be insured by them — in other words, the lender that approves and funds the loan will have to eat its own losses in the event of a default.

Specifically, a lender may be required to eat its losses if it approves a loan without

1. verifying and analyzing the creditworthiness, income, and/or employment of the borrower in accordance with FHA requirements

2. verifying the source the required down payment and/or closing costs in accordance with
FHA requirements

3. addressing property deficiencies identified in the appraisal affecting the health and safety of the
occupants or the structural integrity of the property before funding the loan

4. ensuring that the property appraisal satisfies FHA appraisal requirements

FHA will also require that its approved lenders maintain an acceptable default rate. Currently, that’s defined as “at or below 150 percent of either:

(1) The national average rate for all insured mortgages; or

(2) if the mortgagee operates in a single state, the average rate for insured mortgages in the state.

This proposed rule emphasizes that an approved lender must continually maintain the acceptable claim and
default rate required of it when it is initially granted approval, regardless of whether the loans are approved per FHA guidelines or not. HUD will review lender performance on a continual basis, and those that fail to maintain the required claim and default rate will be subject to termination of their approval.

Which means that lenders will be under more pressure to maintain default rates lower than those of other approved lenders operating in their states. This has already served to pressure credit scores of approved borrowers from an average of 621 a couple of years ago to nearly 700 today — additional pressure will likely continue the trend. Who knows? Fannie and Freddie may end up being the go-to lenders for borderline borrowers. Stranger things have happened.

Full post as published by FHA Mortgage Guide on October 12, 2010 (boomark / email).