The U.S. Department of Housing and Urban Development is making changes to credit and equity requirements on loans insured by the Federal Housing Administration, and hundreds of comments have been received both supporting and opposing the planned changes.
The public was invited on July 15 to comment on three HUD initiatives designed to help restore the Mutual Mortgage Insurance Fund capital reserve account — which has fallen below its statutorily mandated threshold. The proposals include a reduction in the maximum seller-paid closing costs, lower loan-to-values for borrowers with lower credit scores and tighter underwriting standards for manually underwritten loans.
More than 900 comments were received by the comment deadline on Aug. 16, a public filing Friday said.
The “overwhelming majority” of the comments addressed the proposed 3 percent limitation on seller concessions. HUD said it will consider comments on the seller concession cap, come to a decision and address the issue separately. The agency also plans to separately address comments about its proposal to tighten manual underwriting guidelines.
But there were plenty of comments about credit scores and LTVs.
Downpayments for borrowers with credit scores between 500 and 579 will be 10 percent higher than for borrowers with higher scores, HUD said. So it has limited borrowers with credit scores in this range to 90 percent LTV. Borrowers with scores of at least 580 will be eligible for LTVs up to 96.5 percent on purchase transactions and 97.75 percent on rate-term refinances.
A temporary exemption is being provided by HUD for refinance borrowers with scores between 500 and 579 if the current lender is taking a short payoff. The exemption was granted pursuant to Mortgagee Letter 2010-23. Exempt refinance transactions must close by Dec. 31, 2012.
Scores less than 500 will disqualify loan prospects for FHA financing.
“This is the first time that FHA has ever instituted an absolute lower-bound for borrower credit scores,” the filing stated.
HUD explained that the performance of loans to borrowers with credit scores less than 500 is “very poor.” Scores of less than 580 are indicative of borrowers who are “significantly” more likely to default than borrowers with higher scores.
“The revised credit score and LTV requirements increase the likelihood that borrowers who are offered FHA-insured mortgages are capable of repaying these mortgages,” HUD stated.
Some of the comments supported HUD’s revisions, while others said HUD hasn’t gone far enough.
It was suggested that minimum scores be increased to as much as 625. But HUD said that a minimum that is too high could undermine its mission of affordable housing, and the 500 score was selected only after “a careful analysis.”
One commenter predicted the minimum 500 credit score will have a minimal impact because many lenders have internal policies that limit credit scores to 620. Others questioned the usefulness of any credit scoring model.
HUD responded to comments that the credit scores were too restrictive by noting that a score which is too low would “fail to replenish” the Mutual Mortgage Insurance Fund’s capital reserves. It also highlighted the fact that its minimum credit score is well below the 620 required by many private lenders.
“The benefit of the revised credit score and LTV requirements will be to reduce the net losses due to high rates of insurance claims on affected loans, while the cost will be the value of the homeownership opportunity denied to the excluded borrowers,” HUD said.
The filing also indicated that FHA originations have ascended from $56 billion in 2007 to $300 billion during 2009 — pushing FHA market share to 30 percent from just 3 percent.
