If you've been a loan officer long enough, you start to notice certain trends emerge in mortgage rates, mortgage products, and in the market overall.Here's an easy trend that even the layman can understand: When loan defaults spike, mortgage guidelines get tight. Let me repeat what I've alluded to before: It will never be easier to be approved FHA than it is today.
If your homebuying or refinance plans call for a FHA mortgage, consider moving up your time frame.
Here's the three reasons why:
1. Mortgage applicants with lower credit scores now get their "best pricing" with FHA mortgages
2. Unless you live in a rural area or are a veteran, FHA mortgages are now your last remaining low downpayment program.
3. FHA mortgages are insured by the U.S. government
Separately, these points may not seem like much, but put them together, and it's clear why U.S. taxpayers are the insurer of thousands of newly-issued, low-FICO, high-LTV home loans.
The American Homeowner's lovefest with FHA started exactly one year ago -- on the day the conforming mortgage insurer Fannie Mae first instituted loan-level pricing adjustments (i.e. risk-based pricing). Because of LLPAs, mortgage applicants with lower-than-average credit scores found better rates and lower fees through FHA.
Then, between April 2008 and April 2009, as Fannie Mae added new LLPAs and tightened its guidelines, mortgage applicants found FHA to be both cheaper and more flexible than its conforming mortgage cousin. Predictably, the statistical set of mortgage applicants most likely to default went FHA almost exclusively -- if only because there was no other option for them.
FHA insured 1 in every 50 mortgages issued in 2006. Today, it insures 1 in 3.
The FHA's loan portfolio is steadily deteriorating. Fannie Mae and Freddie Mac get every "ultra low risk" mortgage to insure and FHA gets everything else. It's one reason why FHA's cash cushion has plummeted and why the FHA default rate is climbing.
When mortgage defaults rise, mortgage guidelines tighten.
For example, already this year, FHA stopped offering 95% cash out refinances. Instead of lowering the maximum allowable loan-to-value by five percent, though, as is customary, FHA dropped the LTV by 10 percent instead. This signals to the market that FHA's policymakers are concerned about loan quality. It's a leap instead of a step. Downpayment assistance programs are now prohibited, too.
Expect more changes from FHA this year. It may come in the form of risk-based fees, loan-to-value restrictions, or stricter debt-versus-income requirements, but it's going to come. And when it does, some of the people that qualify for FHA home loans today and going to find themselves on the outside of the fence looking in, wishing they acted sooner.
Remember: Each time Fannie and Freddie tighten their guidelines, more of the "riskiest" borrowers go FHA as their back-up plan. It doesn't mean that FHA borrowers are default-prone, per se, it just means that while Fannie and Freddie get the pick of the litter, the FHA gets everyone else. It's why the FHA's loan pool could be more like a cesspool over the next 12-18 months.
Moving forward, expect to read more stories about the FHA and its growing percentage of mortgage defaults. The data won't be telling the whole story, though. The FHA's problems will be the result of Fannie Mae and Freddie Mac turning away borrowers at the door, not FHA's letting everyone in.
