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HUD will address rising risk with FHA loans


Changes are likely to come soon that will make it harder for prospective borrowers to obtain Federal Housing Administration (FHA) loans. It's all part of an effort to dial back loosening credit standards that have seen FHA borrower debt loads and cash-out refinancing activity rise to record levels, top officials with the U.S. Department of Housing and Urban Development (HUD) told reporters on Thursday.

“We will be making some additional changes soon,” said FHA Commissioner Brian Montgomery during a morning conference call. HUD released its fiscal 2018 annual report to Congress on the health of the FHA insurance fund.

fhareport“I couldn’t give you an exact date, but again we want to find that critical balance between providing people with the opportunity for sustainable homeownership, but again we have to maintain the right balance and protect taxpayers against risk.”  

Montgomery didn’t reveal any specific plans on where the tightening may occur, but indicated cash-out refinancing activity was in the cross-hairs of the agency.

In a year where refinances dropped dramatically, FHA’s cash-out counts rose 6 percent, to 150,883, in fiscal 2018.

“Cash-out refinances, both as a percentage of our overall business and our refinance endorsement volume, are growing astronomically,” Montgomery said. Cash-out refinances comprised nearly 63 percent of all refinance transactions in fiscal 2018, up from nearly 39 percent last year, he said.

“The increase in cash-outs presents a potential future risk for us, but also challenges the core tenants of FHA’s taxpayer-backed mission.”

Montgomery said rising debt-to-income (DTI) ratios are another major concern.

“Almost a quarter of our forward-purchase business was comprised of mortgages in which a borrower had a DTI ratio above 50 percent,” he said. “That is the highest percentage since 2000. When you couple that with a trend of decreasing average credit scores — 670 this year versus 676 last year and the lowest average since 2008 — most underwriters and housing-finance experts will say that managing this type of risk without corresponding scrutiny becomes problematic.”

Montgomery also said HUD has concerns about the jurisdictional right and the extent to which government entities, such as state housing-finance agencies, provide downpayment assistance to FHA borrowers.  

Montgomery also indicated that HUD will not be cutting FHA insurance rates in the near future.

“While the [insurance] fund is sound at this point in time, I think we are still far away from being in a position to consider any reduction in our mortgage-insurance premium,” he said.

HUD’s insurance fund ended the 2018 fiscal year in September in better shape than the end of fiscal 2017. The net worth of the fund increased to $34.9 billion, up $8.12 billion at the end of fiscal 2017. The fund’s capital ratio, a closely watched metric that compares the net worth of the fund to the dollar balance of all active insured loans, stood at a 2.76 percent, up from 2.18 percent at the end of fiscal 2017. This was the fourth-consecutive year that the capital ratio has been above Congress’s mandated 2 percent threshold, a level it considers sufficient to sustain losses without government intervention.

The overall fund, however, was once again dragged down by FHA’s reserve-mortgage program, known as the Home Equity Conversion Mortgage (HECM). Reverse mortgages are loans that allow seniors to tap their home equity and remain in their homes for life. They represent a small portion of all FHA-insured loans, but have had an outsized impact on the risk to the fund.

The FHA portfolio of HECM-insured mortgages was estimated to have a negative value of $16.3 billion. The reverse portfolio also had a negative capital ratio of 18.83 percent.

By contrast, FHA's regular forward-loan portfolio — loans commonly taken out by first-time homebuyers  — had an estimated positive value of $46.8 billion and a healthy positive capital ratio of 3.93 percent.  

Montgomery and HUD Secretary Ben Carson, who also joined the morning call with reporters, said that elderly borrowers in the reverse program are being subsidized to an unsustainable degree by the typically lower-income, often minority, first-time homebuyers in the FHA's forward-loan program.

“We are committed to maintaining a viable HECM program, so seniors can continue to age in place, but we can’t continue to see future HECM books being subsidized by our forward-mortgage programs,” Montgomery said. “It is not beneficial to anyone, including taxpayers.”

HUD has taken steps to tighten the program already, including most recently requiring a second appraisal on homes where the value could have been inflated. Montgomery said FHA is working on a plan to conduct a census of all families who live in homes with a HECM mortgage.

Mortgage Bankers Association President Robert Broeksmit said HUD's scrutiny of FHA's credit standards was "prudent." 

“We are glad to see that FHA is closely monitoring the increasing risk in the forward portfolio, indicated by rising debt-to-income ratios, declining credit scores, and the increasing use of downpayment-assistance programs," Broeksmit said. "While current FHA delinquencies are quite low, it is prudent to keep an eye on these trends to ensure the program does not face undue challenges if, and when, the economy and job market cool."

Broeksmit also noted that MBA has previously drawn attention to the HECM portfolio's drain on the fund, and supported recent tightening moves.

"Policymakers should continue considering ways to insulate the forward program from the volatility in the reverse program,” he said.  

That HUD might crack down on FHA-lending standards is worrisome for nonbanks, however. Nonbanks are now originating the bulk of FHA loans today. Reacting to the report,  nonbank trade group the Community Home Lenders Association (CHLA) said HUD should loosen restrictions on the program by eliminating an Obama-era requirement that borrowers hold FHA insurance for the life of the loan.

“CHLA also renews its call for a cut in annual premiums, a move justified by FHA's strong financial performance,” CHLA Executive Director Scott Olson said. 


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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