A move to modernize FHA underwriting.
In the latest of a series of steps designed to make the FHA more competitive, Federal Housing Commissioner Nicolas Retsinas this month is instituting about a dozen changes to the agency's underwriting guidelines.
The revisions - many of which mirror those made over the last year or so in the nongovernment mortgage market - will eliminate unnecessary requirements that were barriers to ownership and provide the flexibility mortgage bankers say they need to approve more nontraditional but nevertheless creditworthy borrowers.
Among other things, income from overtime and bonuses can now be recognized as income, even though it has been received for less than two years, as long as there is reasonable prospect that it will continue. Also, only debts extending 10 months or more are to be included in calculating debt-to-income ratios, and child care is no longer considered recurring debt.
In addition to these long-sought-after changes, HUD also acted to clarify several underwriting requirements so they no longer could be applied in a discriminatory manner. For instance, FHA's alternative documentation policy has been simplified so that applicants won't be penalized if former employers are no longer in business. Now, underwriters are being told they need to verify only current employment.
Retsinas told Mortgage Banking that the changes will make it easier for borderline borrowers to obtain an FHA loan. Though he couldn't quantify how many more are expected to qualify, the FHA commissioner stresses that those who should have passed muster, but didn't under the old rules, will almost certainly do so under the new ones. "Too many people are on the doorstep of homeownership," he says. "This brings them into the room."
The improvements met with praise from industry representatives. Brian Chappelle, vice president of single-family housing at the Mortgage Bankers Association, and a member of the 30-person "Underwriting Working Group" assembled by Retsinas to review the FHA's guidelines and recommend changes, says they show that the agency "is moving in the right direction to expand homeownership. We heartily endorse them."
If nothing else, the revisions should trim precious processing time. HUD's goal, the FHA commissioner says, is that there be "no substantial difference" between the time it takes to win approval for a government-insured loan versus a conventional mortgage.
Because the improvements are consistent with what is considered prudent industry underwriting practices in the nongovernment market, they also should make it far easier on lenders who originate both government and conventional loans. Noting that such companies often underwrite to the lowest common denominator - in this case, the most conservative underwriting criteria - and stop there, Retsinas says FHA loans now "will look like, feel like and be like" all other loans. The changes "put us even" with conventional loans, he adds. Thus, there won't be the opportunity to cling to a stricter underwriting provision that FHA might require as grounds to turn down loans under a strictest-rule-prevails type of underwriting mind-set.
Industry likes changes
"It puts us all on the same page," agrees Jane LeJeune, a member of the working group who, as an assistant vice president with Norwest Mortgage, supervises more than 100 underwriters throughout the country. "Ideally, underwriters should underwrite risk the same way for both conventional and government loans. But they often default to the more conservative guidelines because it's easier than referring back and forth to the [actual underwriting] guides. It's not something they do consciously. It's just human nature."
Retsinas says the agency adopted "essentially all" the recommendations made by the working group, which consisted of representatives from state and local housing finance agencies, community groups, trade associations, the government-sponsored enterprises, mortgage lenders and consumer groups. About the only proposals not ratified were those that must be changed by statute, including loan-to-value ratios and how they are calculated.
But the federal housing commissioner indicated that even those changes could be accommodated if the Clinton administration wins congressional approval to turn the FHA into an "entrepreneurial" government corporation unincumbered by standard government procedure. "This is just a preview of the kinds of things we can do with the flexibility we seek," he says of the revised guidelines.
But Retsinas also stresses he will move forward even if lawmakers reject the president's plan for FHA. He said in mid-January that within the next 60 days, he will create a second working to group to determine how well the revisions are being carried out. And in what he calls "the beginning of a dynamic process," he has vowed to "stay on top of what's happening" in the field. "We will be calling back to see what worked and what didn't, if there were any unintended consequences of what we did, and to find out if there was anything we didn't think of."
A summary of the changes
Here's a rundown of the underwriting modifications:
* Test for income stability - Sources of earnings reasonably expected to last three years can now be included in determining the borrower's income for qualifying purposes. Previously, the rule was five years.
The revised policy now parallels that of not only the two secondary mortgage market agencies - Fannie Mae and Freddie Mac - but also the Veterans Administration. It should have its most profound effect on families receiving child support that will last for at least three years, but perhaps not the previously required five.
* Child care as recurring debt - Another change already adopted by Fannie Mae and Freddie Mac, the cost of child care no longer must be considered in computing debt-to-income ratios. Although child care can be a major expense, it is one that "can be controlled," Retsinas says. If such costs become too burdensome, he explains, most families will find another means of caring for their youngsters.
Worth noting, court-ordered or voluntary support payments must continue to be counted as recurring debt for FHA borrowers.
* Income from overtime and bonuses - To address instances where applicants may not have been receiving such income for a full two years, or where their employers might be unwilling to indicate such income will continue, the FHA now considers less than 24 months acceptable as long as reasonable continuance is determined.
As always, an earnings trend must be established and analyzed, and the underwriter must adequately justify his or her reasoning. But the two-year requirement was deemed "too rigid" and will be dropped.
In today's economy, "it's not unusual for people to work more than one job, and bonuses are often part of someone's compensation package," Retsinas says. "These are very legitimate sources of income," but FHA's requirements were so restrictive that they couldn't be counted to help borrowers qualify.
* Part-time income - The income of applicants whose full-time employment is less than 40 hours a week should not be considered under more restrictive standards for second-job income. In other words, income from the primary job, no matter how many hours, should be included as effective income, not part-time earnings.
Also, FHA's policy has been modified to accommodate ongoing second-job income from employment that hasn't lasted for 24 months but is likely to continue. Again, however, the lender must document that fact.
* Long-term debt - Matching Fannie Mae and Freddie Mac, and making it easier for borrowers with short-term installment obligations to qualify, the FHA's policy is now that only debts of 10 months or more be included in debt-to-income ratios. Previously, long-term debt was considered any obligation of 6 months or more. But underwriters still must consider the borrower's total obligations and that person's ability to meet them during the first few months of the loan.
* Cash - As long as it can be verified and documented, cash saved at home or with private savings clubs is now an acceptable source of funds for closing.
"Different cultures have different ways of saving money," says Retsinas, noting that not only the economics of the housing market have changed, but so, too, have the demographics. "This is a little more than mattress money. This is pick-up-the-phone-and-call-your-relative money."
* Credit reports - Instead of requiring a full-blown residential mortgage credit report, FHA will now accept three repository-merged credit reports. This will not only save borrowers a few dollars - from $15 to $20 for a merged report versus $50 to $60 for a full report - but also allow lenders to process, underwrite and close more quickly.
* Repair requirements - Recognizing that many appraisers often demand cosmetic repairs that have nothing to do with the safety and soundness of a property, the guidelines now advise appraisers, lenders and local HUD offices not to impose any requirements that are unnecessary.
This is a change the working group felt strongly about, according to Retsinas. Not only were appraisers requiring too many repairs, they said, but lenders were afraid to override them because they might be written up by the local HUD office. And real estate agents complained that deals sometimes fell through because of minor, yet expensive cosmetic repair requirements.
The requirements were "often ridiculous," Retsinas concedes. "We're concerned about safety and soundness, not whether bathroom tiles match."
* Automated underwriting - HUD-approved lenders can use electronic underwriting and/or artificial intelligence to approve FHA-insured mortgages. The government will approve lenders, not their systems, the assistant secretary stresses. And loans rejected by a machine must by reviewed by a human underwriter.
* Alternative qualifying - State and local housing finance agencies, described by Retsinas as "laboratories for change," are permitted to use such alternative methodologies as cash-flow analysis in qualifying borrowers. "While we will approve most any underwriting methodology," the federal housing commissioner says, "we wish to have the opportunity to grant an approval. We also want to see what other successful methodologies might exist for across-the-board adoption in the future."
* Mortgage credit certificates - To match Fannie and Freddie's policy, FHA direct endorsement (DE) lenders may now consider the tax credit resulting from mortgage credit certificates as a direct reduction in housing expense. Although the credit results in an increase in an applicant's net monthly income, in other words, lenders may now deduct it from the monthly PITI payment. In that borrowers will receive the full value of the credit, instead of only 30 percent, Retsinas says, their housing buying power will increase substantially.
Sending a message of flexibility
The FHA also acted to clarify several of its policies. Among other things, the agency is making it "perfectly clear" that it permits "a great deal of flexibility." Says Retsinas: "Simply using the 29/41 ratios did not address families that may otherwise be excellent credit risks."
Additionally, branch offices opened by lenders that previously have obtained unconditional direct endorsement status are automatically granted DE approval and only current employment need be verified, as opposed to all employment for the preceding two years.
Lew Sichelman's weekly column on housing is syndicated in more than 150 newspapers throughout the country.
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||Federal Housing Administration|
|Date:||Feb 1, 1995|
|Previous Article:||Evaluating the evidence.|
|Next Article:||The nonperforming secondary market.|