FHA loans could face further underwriting changes
November 15, 2009 by admin
Home buyers have turned to FHA mortgage loans at record percentages in 2009, as limited loan options put the FHA in a crucial role in keeping the real estate markets solvent. The secondary mortgage market has gained limited traction over the past year as investors are still reluctant to purchase pre packaged loan portfolios outside of guidelines endorsed by Fannie Mae, Freddie Mac or FHA. The lack of demand for mortgage backed loan securities has put the financing obligation of the real estate industry squarely at the feet of the U.S. government. The Federal Reserve has played a significant role in the mortgage industry this year. The commitment by the Federal Reserve to purchase mortgage backed loan securities in December and March of this year spurred a dramatic drop in mortgage interest rates, allowing home buyers and home owners to refinance and purchase with record low interest rates.
FHA mortgage loans allow home buyers to purchase with minimal down payments (less than 5%), are more forgiving of a borrowers credit score and offer streamlined refinance options to home owners without a home appraisal. The friendlier underwriting guidelines offered by FHA have led to a surge of volume in FHA mortgage loans over the past twelve months. The surge in volume directly reflects the lack of alternative finance options for borrowers in the mortgage industry and the importance of having competition in the finance industry.
The decision by the HUD to explore underwriting changes to the FHA mortgage comes at a critical time for the industry. The dramatic increase in home foreclosures across the country has been a devastating blow to the mortgage industry, and one in which FHA has not been immune. Publically traded companies Fannie Mae & Freddie Mac have turned to the government for billions of dollars in capital, as their loan losses have surged, they require additional capital injections in order to continue financing new loans. Speculation that FHA will need a large capital injection has been growing for months. The department of HUD has reported that one out of every ten FHA mortgages that were written prior to 2009 has gone into foreclosure. These figures closely follow a national trend that has seen home foreclosures increase every month for the past two years. Foreclosures have been key in forcing banks and lenders to collapse during the economic recession as lenders with large portfolios of mortgage loans have struggled with raising adequate levels of capital to counteract the rise in loan defaults. Many experts are predicting home foreclosures will continue to increase over the next twelve months as unemployment has continued to increase, forcing many home owners to simply walk away from properties severely underwater.
The timing of underwriting changes by FHA could not be worse for the real estate industry. Fresh off a political win with the extension of the home buyer tax credit, which has been expanded to cover move up buyers, the housing market could finally be gaining some sales momentum. FHA’s financial problems are likely from their legacy loans, and not loans that are based on today’s underwriting guidelines. The governments slow response to proactively work with home owners to modify or refinance their mortgage was a mistake of epic proportions. A decision by FHA to further restrict the supply of mortgage lending in a tough market will only prolong the challenges of the real estate industry. This reactive approach is likely to be targeted at first time buyers and potential buyers with less than stellar credit or limited down payments. The lack of alternative finance options from Fannie Mae, Freddie Mac or the private market should be closely monitored with any potential changes that FHA proposes.