FHA Reforms Only Modest Boost to Credit Access

In response to tight mortgage credit, the FHA has announced three changes that it hopes will help to ameliorate lender overlays and broaden access to credit. Specifically, the FHA will consolidate all of its current lending rules into one document that clearly outlines lenders’ responsibilities and penalties for not complying, it plans to increase early reviews of loan files, and finally, it will reduce the fees it charges under certain conditions. In NAR’s 3rd Survey of Mortgage Originators, lenders were asked whether these changes would have an impact.

The FHA’s HAWK program will offer a discount of 10 bps in annual mortgage insurance premium (MIP) and 50 bps in the UFMIP to consumers who complete a buyer education program. The annual MIP would fall by an additional 15 basis points if the borrower is not delinquent after 18 months. The education program is estimated to cost the borrower up to $400 upfront. Respondents were asked whether the incentives are sufficient to attract consumers to the new program. Only 15% of respondents indicated that the incentives would result in increased demand for FHA insurance, while 20% felt that it would help, but could be stronger and 40% felt that they were not. Ten percent of respondents indicated that the upfront costs of the education program were too high for consumers.

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In its press release for the HAWK program, the FHA cited research that shows a reduction in serious delinquency rates of up to 30% for counseled borrowers compared to similar borrowers without counseling. Survey participants were asked whether, given the evidence of reduced risk, the HAWK program would affect lenders’ credit overlays on loans originated for the FHA. A 55% majority indicated that there would be no change in access, while 20% indicated that it would ease credit tightness somewhat and an additional 20% indicated that it would reduce overlays significantly.

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Finally respondents were asked about FHA’s program for earlier reviews of mortgage files. The program is intended to reduce the risk to lenders of problems in loan files that could lead to subsequent costly put-backs. FHA’s intent is to ameliorate concerns about buy-back risk and to reduce lender overlays in turn. Participants were asked whether the early reviews would impact credit overlays on loans originated for the FHA. Sixty percent indicated that there would be no change, while 15% indicated that the reviews would both somewhat and significantly reduce overlays. Ten percent defer to their investors’ rules.

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Survey responses suggest that the changes the FHA is implementing will help. However, while consumer education will help to alleviate overlays, more incentive is needed to attract consumers to the program.

Ken Fears, Director, Regional Economics and Housing Finance

Ken Fears is the Manager of Regional Economics and Housing Finance Policy. He focuses on regional and local market trends found in the Local Market Reports and the Market Watch Reports . He also writes on developments in the mortgage industry and foreclosures.

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Comments
  1. I like the H.A.W.K. program and believe that the counseling piece is important to the future success in sustainability of homeowner. If the homeowner takes the monthly savings and pays it toward their principle balance, in 10 years, it will be a great reduction in their loan balance.