FHA Loan Expert Blog

For several years, the Federal Housing Administration has been the go-to financing resource for cash-strapped home buyers who can’t come up with a big down payment. It has zoomed from barely a 3 percent market share to nearly 30 percent of home purchase loans. But now, wildly popular FHA-insured mortgages could be on the verge of becoming more expensive and tougher to obtain.

In the wake of an independent actuarial study that found the FHA’s insurance fund reserves far below the congressionally mandated minimum, the agency confirms it is actively exploring ways to pump up its reserves - including raising insurance premiums, minimum down payments and other unspecified moves.

How might these changes affect home buyers and refinancers? FHA officials won’t discuss precisely what they’re looking at. But here’s a quick overview of some of the possibilities:

Higher down payments. FHA’s current minimum cash down payment is 3.5 percent. On a $200,000 house, a buyer can bring just $7,000 to the table, aside from closing costs. A purchase of a $500,000 house in a high-cost area requires only $17,500 in cash.

Critics say 3.5 percent does not force purchasers to have enough “skin in the game” to discourage them from missing payments or risking foreclosure. Rep. Scott Garrett, R-N.J., introduced legislation last month requiring a minimum 5 percent down payment for all future FHA loans. Ed Pinto, who served as Fannie Mae’s chief credit officer in the 1980s and is now a mortgage industry consultant, says FHA needs to move to a 10 percent minimum.

But many lenders and mortgage brokers argue that raising the limit could scuttle FHA’s core purpose - serving consumers of modest means. Jeff Lipes, president of Family Choice Mortgage Corp. near Hartford, Conn., says a move to a 10 percent minimum “would effectively eliminate FHA as an option for first-time buyers.” A 5 percent standard would reduce volume, he says, but not exclude such a wide swath of currently eligible borrowers.

Higher mortgage insurance premiums. Currently, FHA charges an “up-front” mortgage insurance premium of 1.75 percent of the loan amount. Most borrowers roll that into their loan and finance it. FHA also charges an annual premium, paid in monthly installments, of either 0.5 percent or 0.55 percent, depending on the down payment. To rebuild reserves, FHA could tweak one or both premiums to yield higher revenues. It could, for example, raise the up-front premium to 2 percent or as high as the current statutory maximum of 2.25 percent. It could also raise the annual fee, but the total premium could not exceed 3 percent under current congressional limits.

Mortgage industry officials say raising premiums would be a logical move, with a gentler impact on borrowers. Lipes calculates that on a $200,000 loan, an increase in the up-front premium to 2 percent - and a move to 0.6 percent on the annual - would raise a borrower’s monthly payment by just $10 at today’s interest rates.

Cutting home-seller “concessions” to borrowers’ loan costs. One of the big attractions of FHA financing has been the agency’s liberal allowance for seller contributions to borrowers to offset settlement and loan-related fees. The current FHA limit is 6 percent of the house price, which critics believe to be excessive. They say the policy effectively allows financially marginal borrowers to buy houses they shouldn’t, thereby raising FHA’s exposure to losses. Pinto calls the 6 percent allowance “insane on a loan with a 3.5 percent down payment.” He wants Congress to order FHA to reduce maximum concessions to 2 percent.

Toughening credit standards. In the mortgage market, FHA is by far the most lenient and flexible player when it comes to evaluating applicants’ creditworthiness. It does not have a minimum credit score, though it permits lenders to impose their own FICO score minimums. FHA also traditionally has been far more tolerant of credit history peccadilloes than Fannie Mae or Freddie Mac. When there are extenuating circumstances associated with credit problems - medical, marital or employment - FHA seeks to give applicants the benefit of the doubt.

But critics say underwriting generosity can lead to higher delinquencies, foreclosures and losses. They want FHA to toughen up. In fact, many mortgage market participants would prefer to see FHA move to the approach used by private insurers - risk-based pricing. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says FHA should calibrate premiums to a tiered system of credit scores and down payment amounts, charging more for borrowers with low down payments and low scores, and less for those with higher cash in the deal and better scores.

“If that’s what it takes to make FHA solvent, I’m all for it,” says Skeens.

U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 89-14
TO:  ALL APPROVED MORTGAGEES
ATTENTION:  Servicing Managers (Single Family)
SUBJECT:  Implementation of Deficiency Judgment Activities
 
     The Department of Housing and Urban Development (HUD) published
its Final Rule on deficiency judgments in the Federal Register on
February 16, 1988 (at 53 FR 4384).  The Rule, which appears in the
Code of Federal Regulations at 24 CFR 203.369, went into effect on
March 28, 1988.  It makes it possible for HUD to require that lenders
pursue deficiency judgments, but only in cases where foreclosures
involve mortgages insured pursuant to firm commitments (or direct
endorsement credit worksheets) issued on or after March 28, 1988.
For those mortgages insured pursuant to firm commitments (or direct
endorsement credit worksheets) issued prior to March 28, 1988, the
Department can continue to request that mortgagees diligently pursue
deficiency judgments against selected mortgagors.  Until recently,
HUD was not authorized to reimburse lenders for the full expense of
obtaining deficiency judgments.  That situation has been rectified by
new regulation 24 CFR 203.402(o), which makes the added costs (which
must be reasonable and customary) of pursuing the judgments 100
percent reimbursable.  HUD strongly encourages mortgagees to
cooperate with requests from Field Offices regarding deficiency
judgments.
 
     The Department has already begun requesting or requiring
mortgagees to obtain deficiency judgments in instances where the
mortgagors are non-occupant owners; have previously defaulted on one
or more FHA-insured mortgages resulting in the payment of claim(s);
or are “walkaways,” having abandoned their mortgage payment
obligations despite their apparent continued ability to pay.  This
will continue to occur where the pursuit of deficiency judgments is
consistent with State law.
 
     HUD will be using data collected by the Department that
identifies mortgagors with two or more FHA-insured mortgages, as
well as information from the single family default monitoring
system.  When these reports are combined, they yield listings of FHA
mortgagors who are by definition non-occupant owners and are also in
a default or pending-foreclosure status (or have already experienced
foreclosure) on one or more FHA-insured mortgage loans.  In addition,
mortgagee monitoring staff outstationed from HUD Headquarters, and
loan management staff in many Field Offices around the country, will
pass along information about prospective subjects for deficiency
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judgments to the staffer responsible for determining which mortgagors
to pursue.  He or she in turn will contact the mortgagees (first by
telephone, then by follow-up letter) to advise them that HUD is
requesting or requiring them to seek deficiency judgments against those
mortgagors who have been selected for such treatment.
 
     Mortgagees, if requested or required by HUD Field Offices to
pursue deficiency judgments against particular mortgagors, will be
instructed to assign all the judgments they obtain to HUD.  (Model
forms facilitating this action will soon be made available by Field
Offices to mortgagees, along with additional instructions.)
Mortgagees are specifically directed not to engage in collection of
deficiency judgments obtained in connection with any FHA-insured
mortgage, effective immediately.  The Department will utilize various
methods to collect once the judgments are assigned, including
conventional means of pursuing the judgment debtors by HUD personnel,
use of private collection agencies and/or judicial proceedings
initiated by the U.S. Department of Justice, salary or administrative
offset (for active or retired Federal and military personnel), and
Internal Revenue Service (IRS) offset of tax refunds.  Some of these
measures may result in additional fees that are chargeable to the
debtor.
 
     If the judgment debt is declared uncollectible, in whole or in
part, by the Federal Government, the amount of the uncollectible
debt will be reported by HUD to the IRS on Form 1099-G.  Mortgagors
who successfully negotiate compromise settlements will also be the
subject of an IRS information return on Form 1099-G for any
indebtedness “forgiven” by the Government under the terms of the
settlement.  Before the Form 1099-G can be filed, however, the debt
amount must be compromised or declared uncollectible by Federal
administrative procedure, or else the applicable Statute of
Limitations on enforcement of the deficiency judgment must have run.
The Department now anticipates that it will have the necessary
procedures in place for Form 1099-G reporting by the second half of
1989.
 
     The procedure of pursuing a specific mortgagor for a deficiency
judgment can begin in two different ways.  As discussed above, HUD
may request or require the mortgagee to take this action based on
data gathered “in-house.”  Alternatively, the mortgagee can initiate
the process by bringing information to the attention of the local HUD
Office indicating that a mortgagor meets the criteria for pursuit of
a deficiency judgment.  The Department encourages lenders to
communicate the details of serious abuses of which they are aware to
the Loan Management Branch Chief at the appropriate HUD Office.
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Please note that only where pursuit of the deficiency judgment was
requested or required by the Department, or where HUD has approved a
mortgagee’s request for permission to pursue a judgment, will the
expenses connected with this action be reimbursable when the claim is
filed.
 
     Another noteworthy aspect of HUD’s deficiency judgment
initiative is the Department’s use of the Claims Without Conveyance
of Title (CWCOT) procedure to establish the Commissioner’s Adjusted
Fair Market Value (CAFMV), which is the amount the mortgagee will bid
at the foreclosure sale.  It is the CAFMV, or, if a third party bids
higher, the consummated third-party purchase price, that is used to
establish the deficiency judgment amount when it is subtracted from
the mortgagor’s outstanding indebtedness at the time of foreclosure.
(Refer to Mortgagee Letter 87-20 , dated June 23, 1987, for a full
explanation of CWCOT.)
 
     The Department will be widely publicizing its efforts to counter
abuse of the FHA Single Family insurance programs through the
prosecution of deficiency judgments and by the reporting of
uncollectible and/or compromised amounts to the IRS.  It is hoped
that these initiatives, directed toward investors, repeat defaulters
and “walkaways” will act as deterrents against abuse.
 
     HUD will be issuing a separate Mortgagee Letter in the near
future, which provides instructions on how to include deficiency
judgment-related expenses in claims for insurance benefits.
 
     The cooperation of participating mortgagees is crucial to our
success, and the Department appreciates your commitment to help us
accomplish this objective.  Please feel free to call the Single
Family Servicing Division at Headquarters if you have any questions
on this matter, at (202) 755-7330.
 
                                   Sincerely yours,
 
                                   James E. Schoenberger
                                   General Deputy Assistant Secretary
                                     for Housing
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