Loan Modification

Are ?too many? FHA mortgages a problem?

By Peter G. Miller

Part of the good news which resulted from the passage of the Wall Street Reform Act was the decision to create a ?Qualified Residential Mortgage? standard or QRM. In basic terms, the deal is that if a lender offers a QRM such as a conventional, VA for FHA loan that has a fully-documented mortgage application it cannot be easily sued for abusing a borrower.

Of course, the mortgage industry is now greatly concerned about the specific rules related to QRMs and is busily trying to overturn by regulation what it could not earn through legislation.

One of the major targets of this effort is the FHA loan program.

“Unless the QRM definition is calibrated properly,” says the Mortgage Bankers Association in a letter to regulators, “there is a danger that the FHA program could be over utilized.”

Really? What exactly is the danger? Who, precisely, is endangered?

The MBA would like the new mortgage regulations now being developed in Washington to include certain allowances. For instance, the MBA says “interest-only mortgages should be permitted so long as they are underwritten at the fully indexed/fully amortizing payment and are originated subject to other requirements including requirements for documentation and verification. Regulators could also consider adding mandatory counseling and/or escrow account components for particular categories of homeowners.”

Right. There’s a good idea.

Let’s say you want to borrow $200,000 at 4.5% percent over 30 years. The fixed rate cost for principal and interest will be $1,013.37. The initial monthly cost for an interest-only loan? That would be $750. Of course, if the loan become self-amortizing after five years then we would effectively have a 25-year mortgage. If the rate was still 4.5% fixed (not likely) the monthly payment would then go to $1,111.66. Can anyone say: Payment Shock?

Of course, if the new interest rate was, say 7 percent, then the revised monthly payment for principal and interest would be $1,413.56. Historically, of course, interest rates are a lot more likely to be at 7 percent than at 4.5 percent.

Does this seem familiar? Is this not the same thinking which go us into the mortgage mess? How many people with interest-only payments have been foreclosed?

One has to ask how, exactly, is the “over-utilization” of the FHA loan program a danger? Who would be hurt? Is it possible that private-sector lenders have been over-utilized?

Private-sector lenders could have easily limited and FHA market share and prevented the over-utilization they apparently fear. For instance, they could have refrained from selling option ARMs. They could have required that all borrowers submit fully-documented loan applications. They could have eliminated prepayment penalties. They could match the FHA’s “cure” rate: In fiscal 2009 ?82.7 percent of the HUD-held loans that are 90 days or more delinquent were brought under control.?

The nation’s new regulators should read the lender’s letter, ask who benefits, look at recent mortgage history, think about the term “special interest” and give the letter such attention as it deserves.

Full post as published by FHA Mortgage Guide on November 17, 2010 (boomark / email).