If you originate FHA-backed loans, you already are aware that the mortgage insurance premium policy change that recently took effect creates new challenges for the mortgage industry.
In a nutshell, the policy change now requires all loans insured by the Federal Housing Administration (FHA) with loan-to-value ratios over 90% to maintain mortgage insurance (MI) for the life of the loan. Previously, the FHA permitted MI to drop off at 78%.
The effect of this change will be higher rates – sometimes much higher – resulting in more higher-priced mortgage loans (HPMLs) under Regulation Z, which uses the Average Prime Offer Rate +1.5% as its benchmark.
Making a higher-priced loan is a perfectly legal thing to do. However, it is the policy of many, if not the majority, of originators not to make them. In some cases, these loans make originators too vulnerable to regulatory scrutiny, while in others, lenders simply cannot figure out how to make them at a reasonable profit.
So, while the industry quickly shifts from a refinance market to a purchase-money one, and with FHA-insured loans representing a record number of originations, the policy change is likely to have a significant impact.
What's more, it seems that those who may be hit hardest by this change are borrowers seeking smaller loan sizes. In effect, here is a rule change that may have the unintended effect of restricting the availability of credit to those who need it the most.
It seems that so many of the changes coming from Washington, D.C., do in fact have the adverse consequence of credit restriction. On June 3, FHA Commissioner Carol Galante addressed the concerns raised by the industry, acknowledging the potential for higher-priced loans.
It is imperative that you comply with the HPML requirements, including documenting the ability to repay and requiring escrows for at least five years. Fortunately, most of these requirements are already satisfied by FHA underwriting guidelines, so the burden will be relatively low.
Again, it really comes down to a lender's business model and whether you willingly make HPML loans.
If you are looking for help with this issue, it is not to be found, at least not yet. But with a little patience, there may be light at the end of the tunnel. Galante did hint at the possibility that the FHA's not-yet-released version of the qualified mortgage (QM) rule may account for HPML loans. If it does not adequately address the issue, then consumers looking for smaller loans and 3% down payments – young first-time home buyers as well as many individuals in protected groups – may suffer the most.
So, in the end, be patient and careful. For now, the most important thing you can do is make sure your HPML FHA loans are fully underwritten and follow the HPML requirements.
And hopefully soon, the FHA will announce a robust QM standard to help ease the burden, making this a short-term problem.
Roger Fendelman is vice president of compliance for Interthinx.