Yesterday, Thursday, January 21st, the much anticipated Mortgagee newsletter about risk-based pricing was released by HUD. This represents the first of two landmark changes in the agency’s guidelines for this year.
In December HUD (Housing and Urban Development), the agency that oversees the underwriting of FHA loans, had warned that these changes were on the way for “risk-based pricing”. In other words, the riskier the borrower the more expensive the loan and/or the higher the interest rate. The second announcement was leaked last Friday, January 15th, imposing a one-year moratorium on the FHA guideline that previously had prevented investors from flipping homes to FHA borrowers within the first 90 days of ownership. Prior to this announcement investors were only able to sell these homes via Conventional, VA or private funds (cash).
1) Risk Based Pricing: To sum up the ‘Mortgagee letter 2010-02′ published by HUD, this change represents an increase of 0.5% of the loan amount to the Up Front Private Mortgage Insurance Premiums on all FHA loans. As an example, under the old plan, for a loan amount of $300,000 the consumer had to buy a mortgage insurance policy of $5,250 to insure the loan against default. After April 5th 2010, the same policy will go up to $6,750. That is an increase of about 29%. The explanation is simple. After the demise of the Sub-prime era, FHA became the only lending source for buyers that had less than perfect credit, and also only required a 3.5% down payment. This provides home buyers the option of having very little “skin in the game”. In 2007 FHA loans represented less than 5% of all the loans originated in the US. In 2008 these loans began to gain popularity and in 2009 they represented the majority (80%+) of the loans for first time home buyers. My bet is that even with the increase in the Mortgage Insurance Premium, these loans will not lose ANY of their current popularity.
2) The second change, designed to allow quicker foreclosure resale’s, may have a very significant effect on our overall economy. If you are a first time home buyer, I don’t need to tell you how frustrating and lengthy the process you have to go through in order to get an offer accepted, especially if your financing includes an FHA loan. It feels at times as if the money to purchase the property is not green. By placing a moratorium on the 90 day waiting rule to flip a property, we might be giving the first time home buyer a fair shot to get an offer to buy a home accepted. Investors need to unload these properties as quickly as possible. The rule specifies that as long as the profit from the resale is 20% or less no further action is required. However, if the profit is higher than 20%, the seller must provide proof of the improvements made to the property to substantiate the higher price. In addition, most lenders will require a second appraisal to make sure the buyer is not paying above-market pricing, and the lender is not getting into a negative-equity position.
The silver lining of these changes is this: the increase in PMI will offset losses already incurred by HUD, and not decrease the volume of FHA borrowers. The lifting of the 90-day rule gives FHA borrowers a better chance of being able to buy a rehabbed home.
Michael Mekler is an active loan officer. Reach Michael via email at mmekler@fhaexpert.net or call toll-free to 1-888-218-0094
