Widespread Primary Market FHA, VA, USDA Changes

By rchrisman@robchrisman.com

 

Maybe in order to understand mankind, we have to look at the word itself: "Mankind."

Basically, it's made up of two separate words, mank and ind.

What do these words mean? It's a mystery, and that's why so is mankind.

FHA, VA, and USDA changes? Tons. Last week we noticed that Ginnie Mae volumes had passed Freddie Mac, so the absence of big banks doing that business was certainly taken up by non-depository lenders. But where does the program, and Ginnie issuance, go from here?

Bose George with KBW did a fine piece on thoughts about the likelihood of a premium cut by the FHA at its recent Mortgage Finance Conference. "Given the large (50 bps) cut in January 2015, the FHA's ability to cut rates meaningfully is somewhat limited, in our view. While we estimate that roughly 15% of private mortgage insurance volume could theoretically be at risk, we believe that there are significant offsets. First, roughly 20% of FHA business is still being written in the over 720 FICO bucket and we believe that a meaningful portion of this is likely to move back to the GSEs over time. Also, if payments are fairly close, lenders are likely to choose a GSE execution. Finally, we think the impact of the FHA rate cut last year was fairly small and industry NIW data overstated the impact because of the large pick-up in FHA-to-FHA refinance activity, which did not impact IIF."

 In other words, an FHA cut Is possible but not inevitable given that there is no broad coalition to do so. "Before the FHA premium cut in 2015, there was broad industry pressure for a cut... The Mortgage Bankers Association (MBA) has said that the level of the FHA premium is not an impediment to credit availability through the FHA. Also, while the FHA capital level is above the 2% minimum, the capital ratio for the traditional FHA (forward) mortgage program was only 1.6% at the end of FY2015. The total capital of 2.1% was boosted by a 6.4% capital ratio in the HECM (reverse mortgage) program, and the FHA annual report noted the volatility of capital in that business and suggested that it might make sense to separate out capital requirements for the two programs.

 "The current FHA premium is currently 80-85 bps, down from 130-135 bps before the rate cut in January 2015. The average annual premium pre-crisis was 50-55 bps. So if premiums are cut again, we believe that the floor is likely to be the pre-crisis premium level, which would suggest a 30 bps reduction. The upfront premium remains at 175 bps and that number was 150 bps pre-crisis, so a change would have no meaningful impact. Finally, there has been discussion about making FHA cancellable again. We believe this is less likely. It is an infrequently used option by borrowers but one that would have a negative impact on FHA capital."

 The report goes on, saying that a longer term share shift away from the FHA program should continue. "Roughly 20% of FHA mortgages are made to borrowers with a FICO score over 720 and we estimate that over 20% (roughly $250 billion of FHA insurance in force) is 720+ FICO, largely originated in 2012-2015. We expect a meaningful part of this book of business to shift to the MIs over time...Most large banks have sharply reduced their exposure to the FHA. We think this makes the market somewhat less efficient since bigger banks will prefer a GSE execution if there isn't a meaningful difference in the rate to the borrower. This should allow the MIs to be more competitive in the borderline buckets where FHA might have small advantage just based on borrower payments."

 But the FHA hasn't been sitting on its hands. It revised its troubled-loan program, aiming to keep borrowers in homes.  Changes could reduce the amount of money investors are willing to pay for the mortgages, critics say.  The Obama administration is making changes to a program that sells distressed mortgages to investors that will make it easier for borrowers to stay in their homes but could also cost taxpayers money.  The changes, announced by the Federal Housing Administration on Thursday, require investors to prioritize reducing the amount borrowers owe on their mortgages before moving to other options such as reducing interest rates.

 FHA's Mortgagee Letter 2016-09, Delivery of Advice of Payment and Title Approval, announced the elimination of hard copy mailings of Advice of Payment and Title Approval letters to holders and servicers, with certain exceptions¹, as the information is available electronically through the FHA Connection (FHAC) system. FHA will discontinue the hard copy mailings on June 28, 2016. elimination of the hard copy mailings of the two letters does not change the FHA requirement that the information be maintained by the mortgagee in the mortgagee's Claim Review File.

 Sun West recognizes that in order to improve the services to FHA borrowers with credit scores below 640, specialized analysis is necessary to accommodate more home buyers in this end of the credit spectrum. As a result, Sun West has created a set of Comprehensive Credit Review Guidelines to assist in the substantive review of these borrowers. If the loan has a DU Approval or an LP Accept (i.e. FHA Total Score Card), Sun West will continue to rely upon the automated approval along with the Comprehensive Credit Review Guidelines to evaluate the borrower's special circumstances, such as payment history, savings pattern, re-established credit history after financially adverse events, extenuating circumstances, and any documentation related to extenuating circumstances.

 As of July 1^st, Wells Fargo price adjustors for non-conforming loans updates will effect loan amounts >=1 MM to show a price improvement of 0.125. A price worsening of 0.125 for loan amounts >417,000 to <=625,500 will be applicable. Also beginning July 1, 2016, the following government adjusters will originate as Loan Level Price Adjusters (LLPAs) rather than adjusters to Servicing Release Premium (SRP):  Best Effort Government Non-Owner price adjuster (0.500) and FRM FHA/GRH Refi price adjuster (0.125). Mandatory Government Non-Owner price adjuster (0.500) and Fixed Rate FHA/GRH Refi price adjuster (0.125). Adjuster amounts are not changing.

 Peoples Bank (KS) has revised its FHA and VA Guidelines.  Revisions include: FHA purchase transactions will maintain a minimum FICO Score of 620, however, an exception down to 600 will be allowed if approved by National Underwriting Manager or Director of Mortgage Credit/Risk, AND meet two required compensating factors.  Streamline Refi's will allow No Income/Credit Qualifying - down to a FICO Score of 600 - for all eligible Investors. FHA High Balance loans minimum FICO Score has been reduced from 660 to 640. Its VA IRRL program has a reduced minimum FICO Score down to 600 for all eligible Investors.  If Recoup period exceeds 36 months - Income verification is not required IF it meets the No Income Requirement Guideline stated on the VA Matrix. VA IRRRL's are no longer allowed to be brokered due to Recoup Period issues. VA Cash Out program has a reduced minimum FICO Score to 600, to any eligible Investor, with a DU Approve/Eligible or LP Accept/Eligible on loan amounts up to $417,000.

 Banc Home Loans isamenable to underwriting FHA and VA loans for our delegated clients, such as: FHA Back to Work, Manufactured Housing, Renovation Loans (203K, FNMA HomeStyle), AUS Refers, FHA FICOs to 580, VA FICOs to 600 and Joint VA loans. Find out more by visiting its website.

 M&T requires, on all FHA transactions, both standard and limited, to have the following language included within the security instrument recorded for the transaction, not the Rehab rider: "Provisions pertaining to release are contained in the Rehabilitation Loan Rider is a required modification to the security instrument on all 203(K) transactions.

 Sun West Mortgage's 203k Consultant approved list has been reviewed and must be adhered to prior to ordering any Consultant services or making any agreements with the Consultant or the borrower.

 In USDA news, Freedom Mortgage Corporation announced that its acquisition of the origination assets of JPMorgan Chase's Rural Housing business has been completed.  After months of preparation and transition since the acquisition agreement was announced in April, the business unit is fully operational as Freedom Rural Housing as of July 1. "The newly renamed unit will continue to provide funds to suit the unique requirements of USDA residential customers nationwide through the correspondent team that was in place during its ownership by JPMorgan Chase.  Over 90 employees have joined Freedom Mortgage's team in the acquisition.  Affecting about 80 percent of the land area and 20 percent of the population of the United States, USDA mortgage volume totaled over $22 billion in 2015, according to government figures."

 AmeriHome's USDA Guaranteed Rural Housing Program Guide has been updated with guidelines changes per USDA announcement on May 26, 2016, and effective on June 2, 2016 "for all commitments issued by USDA." Guideline changes impact both AmeriHome's USDA and USDA Streamline products.

 Ditech Financial LLC spread the word to its clients that under the USDA Non-Streamlined Refinance program, the USDA will no longer require that the interest rate on the refinance loan be at least 1% below the interest rate of the original loan. The new rate must now be less than or equal to the rate of the loan being refinanced. Please refer to the product summary for all product restrictions.

 As of June 24^th, Flagstar updated its USDA product. Updates included overlay requiring minimum of three trade lines to validate credit score has been reduced to two trade lines. In addition, the previously required 1% interest rate reduction on refinance transactions now only needs to be at or below the existing rate. Also, the overlay that did not allow non-permanent resident alien to be considered eligible borrowers has been revamped. These borrowers may now be considered eligible.

 Franklin American spread the word to its clients that, "As per the Rural Development Single Family Housing Guaranteed Origination announcement dated April 28th, 2016, advance notice was given of the upfront guarantee fee and annual fee structure that will be effective for the Single Family Housing Guaranteed Loan Program in the fiscal year 2017. The fiscal year 2017 begins October 1, 2016 and ends September 30, 2017. Upfront Guarantee Fee: 2016 Fiscal Year: 2.75% Current (ends September 30, 2016), 2017 Fiscal Year: 1.00% effective with Conditional Commitments issued on and after October 1, 2016.

 Turning to interest rates, the end of the refi boom long predicted by experts is not very near. Let's hope everyone had a "safe and sane" 4^th of July holiday. And now we're confronted with another week's worth of scheduled economic data. And lenders are seeing margin calls from broker-dealers with the shift in MBS prices. Jobs and housing make up the lion's share of the U.S. economy, and this week the focus will be on jobs.

 But we start today with Factory Orders. Tomorrow are the mortgage application numbers from last week along with the May Trade Balance and some Markit figures of small significance. Of greater interest will be that afternoon's release of the meeting minutes from the Fed's get-together in mid-June. Thursday the 7^th will be the ADP Employment Change stats along with Initial Jobless Claims. And then Friday is the Big Daddy: Nonfarm Payrolls, the Unemployment Rate, and Hourly Earnings.

 We are, this morning, down to a yield of 1.39% on the 10-year risk-free T-note, and agency MBS prices are generally better by .250 depending on coupon. The "risk off" trade is back, with, you guessed it, continued nervousness about the impact of the UK eventually leaving the European Union. That will take years, but until then...