FHA Toughened Standards on Manually Underwritten Loans Ahead of Today's Shortfall

Before today’s news of a shortfall in its Mutual Mortgage Insurance Fund, The Federal Housing Administration (FHA)rnissued new guidelines for lenders who manually underwrite FHA-backedrnmortgage loans.  The new underwritingrnrequirements are intended to encourage lenders to use what FHA described as arndefined set of objective standards and compensating factors to makernresponsible, risk-based underwriting decisions. rnThe Agency said the new rules should also increase the pool of eligiblernborrowers.</p

MostrnFHA-insured loans are approved through automated underwriting systems thatrnscore applications using FHA’s TOTAL Mortgage Scorecard.  This evaluates borrowers based on creditrnscores and other loan factors.  When TOTAL delivers a Refer scoringrnrecommendation or when borrowers were not scored because they do not haverncredit scores, lenders are required to manually underwrite the loan. Thisrnmanual underwriting allows use of compensating factors to help borrowersrnqualify for loans outside of automated standards.  </p

The new guidelines issued today arernamong those contained in a document issued on July 15, 2010 in which thernDepartment of Housing and Urban Development (HUD) solicited comments on threernproposals designed to address features that had resulted in high losses to FHA’srnMutual Mortgage Insurance Fund capital reserve account.  There were 902 public comments received, thernmajority of which concerned the proposal to reduce allowable sellerrnconcessions.  Because of the volume ofrncomments and the issues raised HUD decided to separately implement each of thernthree initiatives in the 2010 notice.   </p

The final initiative to be implemented afterrnincorporating the public comments are revisions to the manual underwritingrnrequirements.  Specific policy revisions included in this regulation arernreserve requirements for all manually underwritten borrowers, establishingrnmaximum qualifying ratios based on credit score and compensating factors; andrnproviding a revised list of acceptable compensating factors with objectiverndocumentation requirements for assessing these factors.  </p

For borrowers who exceed the 31 percentrnhousing-to-income ratio yet carry little or no discretionary debt and thus dornnot exceed the maximum 43 percent debt to income ratio, compensating factorsrnhave been allowed.  The new guidelines establishrnmaximum front and back end rations that may not be exceeded based on thernborrower’s credit score.  Borrowers withrnno score or with scores below 580 may not exceed the 31/43 maximums.  Borrowers with credit scores of 580 or higherrnmay be approved for ratios as high as 37/47 with one compensating factor andrn40/50 with two.  The new guidelines alsornrestrict the use of compensating factors to borrowers with credit scores of 580rnor higher unless they meet the Energy Efficient Mortgage Requirements whichrnpermit maximum stretch ratios of 33/45.  </p

Manually underwrittenrnloans are required to have reserves equal to at least one full monthly mortgagernpayment for single family and duplex properties and three full months forrnbuildings with three or four units.</p

HUD has not yetrnestablished an effective date for the new regulations but says it will not bernearlier than March 11, 2014. In the interim the Department is inviting publicrncomment on one aspect of the new regulations; the lowering of the credit scorernlevel under which compensating factors cannot be cited from 620 to 580.  Comments must be received by February 10,rn2014.   </p

HUDrnsaid the new requirements are intended to encourage lenders to use a definedrnset of objective standards and ‘compensating factors’ in order to makernresponsible, risk-based underwriting decisions.  In addition, FHA’s manualrnunderwriting guidance addresses loan characteristics such as highrndebt-to-income ratios and a lack of financial reserves that can result in highrnrates of default and foreclosure.  </p

The new regulations arernapplicable to all purchase transactions and credit qualifying FHArnrefinances.  FHA will shortly publish a Mortgagee Letter that willrnprovide additional operational information for lenders.

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.