Delay Sought on FHA Risked Based Premiums

HUD recently proposed to have lenders use risk-based premium pricing on single-family, Federal Housing Administration-insured loans that are assigned a case number on or after Jan. 1. Risk factors, such as credit scores, downpayment and source of downpayment, would be considered in the calculation, according to a recent Federal Register notice that gave until Oct. 22 for comments on this plan.

“By offering a range of premiums based on risk, FHA will be able to offer options to mortgagees serving borrowers who were previously underserved, or not served, by the conventional marketplace,” HUD said in the Sept. 20 notice.

Additionally, HUD said it believes a risk-based premium structure not only encourages consumers to become safer risk by, for example, increasing their downpayment or improving their credit scores, stories, but “will also ensure the future financial soundness” of FHA insurance programs.

Currently, the upfront mortgage insurance premium is 1.50 percent for all loans. This level was set in late 2000, down from the statutory limit of 2.25 percent for most borrowers and 1.75 percent for first-time borrowers who underwent housing counseling, in response to the FHA fund experiencing an “unprecedented financial turnaround,” reaching a positive economic value of $16 billion from a negative value of $2.6 billion a decade earlier, according to a mortgage letter.

Under the new risk-based pricing structure, premiums would vary from 75 basis points for borrowers with the highest credit scores and largest downpayments to the current statutory limit of 225 BPS for those with lower scores and limited downpayments, the Mortgage Bankers Association noted in a response letter to the proposal.

Borrowers who either provide their own downpayment or receive assistance from family would pay, in most instances, 50 BPS less than borrowers with the same credit score who received assistance from other sources. Furthermore, borrowers who use downpayment funds from a source other than themselves or a relative must have a minimum credit score of 620 to qualify for FHA insurance, MBA added.

Meanwhile, first-time borrowers, who would otherwise pay an upfront premium of 225 BPS, will reportedly pay an upfront premium of no more than 200 BPS if they complete qualified pre-purchase homeownership counseling.

HUD’s decision to transition from a uniform upfront premium to a risk-based pricing structure came in response to market conditions that significantly reversing FHA fund growth, dwindling FHA market share, and the president’s budget submission for fiscal year 2008. Noting that the fund will not collect enough revenue to cover expenses incurred by insurance claims with the current premium, the budget proposed risk-based pricing or a single premium of 166 BPS, MBA reported.

While MBA recognizes FHA’s capacity to serve its mission relies on a solvent FHA fund, it is particularly concerned about the speed with which FHA plans to implement the new structure. MBA strongly recommended a delay implementation to May 1, 2008, or approximately six months past the finalization of the structure, to ensure lenders have sufficient time to implement it into their systems, considering the proposed deadline is too short of a time frame amid lenders already devoting “technological resources to previously scheduled system updates and those required to keep pace with vast changes in the credit markets.”

Additionally, “MBA believes that recent market developments and actions taken by HUD since the proposal’s publication should, at least partially, alleviate the budget concerns which prompted FHA to propose a quick transition to risk-based premiums,” the letter read.

The trade group suggested costs could also be lowered by no longer insuring mortgages that pose higher risk and said FHA has already taken such a step through the Oct. 1 finalized rule prohibiting downpayment assistance from sellers or third parties that are directly or indirectly reimbursed by the seller.

“Presumably, the final rule prohibiting seller funded downpayment will reduce not only the number of loans that result in claims against the [FHA fund], but improve the financial outlook for the upcoming year,” MBA said. “In light of this action, MBA strongly encourages FHA to reexamine the budgetary need to implement a new risk-based premium structure by January 1.”

Also, because seller funded downpayment assistance was acceptable at the time HUD proposed the risk-based premium structure, MBA recommended the proposal’s reference to downpayment funding from “other sources” be clarified since higher upfront premiums are charged to borrowers using downpayments funded by such sources. MBA noted many borrowers receive downpayment assistance from state housing finance authority programs in the form of low interest loans and the programs commonly include housing counseling.

“FHA may wish to consider if such mitigating factors offset the additional risk presented by a borrower who does not directly invest funds into a purchase,” MBA said. “This is particularly relevant for borrowers with credit scores below 620 and, under the Proposal’s guidelines, would not be eligible for FHA insurance unless they or a family member funded a downpayment of at least three percent.”

MBA also highlighted that the H.R. 1852 bill the House of Representatives passed on Sept. 18 includes significant changes to the way risk-based premiums are calculated.

FHA should delay final implementation in order “to amend premium structures to reflect any legislative changes that occur in the interim,” MBA said. “Otherwise, lenders face the real possibility of having to overhaul systems twice in a very short period of time.”