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Proposed Changes to FHA

Posted on October 30, 2007 by Ray Williams.

There has been talk about FHA reform for years – below highlights some of the changes that have been proposed to take effect in January 2008.  For more details read the entire proposal.  This is a federal program so if you have comments or suggestions that you would like heard you can submit by clicking on this link.

Questions Regarding Proposed FHA Risk-Based Premiums
To Federal Register Notice FR-5171

Under FHA’s Risk-based premium structure, what is the range of upfront mortgage insurance premiums that you will charge?

The upfront premium will range from 0.75% of the loan amount for lower-risk mortgages up to a maximum of 2.25% for those considered riskier.

What criteria is FHA using to determine the premium for mortgages it will insure?

For now, the premium will be based on a credit bureau score and the amount of the downpayment made by the borrower. In addition, the source of the downpayment is also considered in determining the premium.

What if the borrower has no credit bureau score? What happens in that event?

For those borrowers without sufficient trade lines to develop a credit bureau score, they will have to have a downpayment of at least 5% of their own money to qualify for FHA-insured financing and will pay 2.25% upfront. These borrowers can lower the premium to 2.00% by making a downpayment of 10% of their own money.

If I am reading the premium chart correctly, it appears that borrowers who rely on downpayment assistance from a source like a nonprofit have to have a 620 credit bureau score. Is that correct?

Yes. If a borrower’s downpayment is from other than his/her own fund or from a family member, then the borrower must have a 620 credit bureau score to qualify.

If FHA has existing statutory authority to risk-base its premiums, why did it request legislation for risk-based premiums?

While FHA does have authority to risk-base its premiums, the Administration’s bill makes explicit that FHA will charge a premium commensurate with the risk. The Administration asked for legislation to remove the existing premium caps in order for FHA to serve some borrowers it otherwise cannot, i.e., those who represent greater risk than could be borne by the existing maximum premiums. However, in the absence of that legislation, FHA elected to develop a risk-based premium structure based on existing statutory authority.

In addition, why has FHA waited until now to price for risk, as do other insurers?

Since it appeared unlikely that Congress would appropriate funds for FHA to continue its operations, FHA had a choice: either raise premiums across the board for all borrowers, thereby exacerbating adverse selection, or adopt the risk-based premium structure, with existing caps, that takes effect January 1, 2008.

The proposed rule requires that all mortgages be scored through FHA’s TOTAL Mortgage Scorecard. Why is that and how does this benefit the lender or the borrower?

First, while risk-based premiums will initially be based on credit bureau score and downpayment amount (and source), FHA plans to further refine the premiums by using TOTAL to determine the premium. Second, because FHA’s premiums are now based on risk, it can lower the accept/refer cut point to allow a greater percentage of mortgages to receive the accept risk classification with all the associated benefits, e.g., documentation relief.

If my borrower does get a “refer” from the TOTAL Mortgage Scorecard, what is the premium that is to be charged?

If the risk classification is a “refer,” the Direct Endorsement underwriter must determine that the borrower is an acceptable risk and meets FHA’s underwriting guidelines. However, the mortgage insurance premium does not change, i.e., the price shown on the premium grid will be the price charged the borrower.

FHA’s definition of “decision” credit score, at least when there are two borrowers, is slightly different from what we’re used to on conventional mortgages. Why is that?

FHA believes that by using the “average” of decision scores, rather than the lower of two scores, that a higher percentage of such borrowers will be able to receive a reduced premium.

The premium matrix or grid appears to exclude some borrower profiles from obtaining an FHA-insured mortgage. Is this correct?

Yes. As FHA has improved its ability to discern mortgage insurance risk, it also has improved its ability to recognize those borrowers who are not quite ready for the financial challenges of homeownership. FHA believes that sustainability of homeownership is just as important as helping first-time homebuyers and recommends that lenders refer such potential homebuyers to homeownership counseling.

The premium notice has a reference to first-time homebuyers who receive pre-purchase counseling. What does this mean?

It means that if the borrower is otherwise eligible, and is a first-time homebuyer who has received pre-purchase homeownership counseling, that the maximum upfront premium is not to exceed 2.00%. Thus, borrowers falling into the 2.25% premium cell, if otherwise eligible for FHA insured financing, would pay only 2.00% upfront if they are first-time homebuyers who received pre-purchase counseling prior to execution of the sales contract.

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