Will Trump Make the FHA More User Friendly?

National Mortgage News - - Origination - By brian collins

the trump ad­min­is­tra­tion wants to roll back the rules and reg­u­la­tions to strengthen the econ­omy and the hous­ing mar­ket.

“These poli­cies will un­shackle our econ­omy and cre­ate and sus­tain high-pay­ing jobs so that more Amer­i­cans have the re­sources and free­dom they de­serve to ful­fill their Amer­i­can dream,” Pres­i­dent Trump said in a procla­ma­tion is­sued last month.

One way to in­crease home­own­er­ship is to make U.S gov­ern­ment-backed mort­gages more ac­ces­si­ble to new home­buy­ers.

But that is not so easy when in­ven­tory of new and ex­ist­ing homes is so tight. And lenders are only start­ing to ease up on credit stan­dards.

At a Depart­ment of Hous­ing and Ur­ban Devel­op­ment-spon­sored hous­ing fo­rum last month, Sec­re­tary Ben Car­son noted that the Fed­eral Hous­ing Ad­min­is­tra­tion has a “strong role to play” in the hous­ing mar­ket. “An es­ti­mated 40% of first­time bor­row­ers use FHA.”

How­ever, first-time buy­ers are typ­i­cally less cred­it­wor­thy than re­peat buy­ers. And they are gen­er­ally more de­pen­dent on FHA fi­nanc­ing, as op­posed to loans guar­an­teed by Fan­nie Mae and Fred­die Mac.

The FHA tol­er­ates lower credit scores and higher debt-to-in­come ra­tios than Fan­nie and Fred­die. It also al­lows down pay­ments as low as 3.5%. The av­er­age loan-to-value ra­tio for a first-time FHA bor­rower is 95.5%. For Fan­nie and Fred­die first-time bor­row­ers, the av­er­age LTV ra­tio is 86.5%, ac­cord­ing to the Ur­ban In­sti­tute.

The FHA’s gate­way to home­own­er­ship could be wider if the Trump ad­min­is­tra­tion takes ac­tions to re­duce mort­gage in­sur­ance pre­mi­ums and clar­ify lender penal­ties un­der the False Claims Act.

The FHA’s fi­nan­cial con­di­tion has im­proved over the past few years. And the FHA could lower its upfront fee from 85 ba­sis points to 60 ba­sis points, as pro­posed by the Obama ad­min­is­tra­tion.

The pre­mium re­duc­tion was due to go into ef­fect Jan. 27 but it was placed on hold by the new Trump ad­min­is­tra­tion. Car­son did not men­tion an FHA pre­mium re­duc­tion in his re­marks at the hous­ing fo­rum.

The Na­tional As­so­ci­a­tion of Real­tors “be­lieve FHA in­sur­ance pre­mi­ums can come down a bit be­cause it has sur­passed its cap­i­tal re­serve re­quire­ment,” ac­cord­ing to NAR Chief Economist Lawrence Yun.

Yun also stressed that it will be im­por­tant to in­crease the sup­ply of new homes to “tame house price growth and make hous­ing more af­ford­able to mid­dle-class, first-time home­buy­ers.”

Over the past five years, home val­ues have risen 40% while wages only by 10%. “We need to en­sure there is an in­cen­tive for the home­builders to build starter homes, more af­ford­able homes,” Yun said.

For the FHA to in­crease its mar­ket share sig­nif­i­cantly, the new ad­min­is­tra­tion “needs to cre­ate and en­force a clear and fair set of rules for lenders,” ac­cord­ing to Lau­rie Good­man, direc­tor of the Hous­ing Fi­nance Pol­icy Cen­ter at the Ur­ban In­sti­tute.

“Triple dam­ages un­der the False Claims Act have to be re-ex­am­ined,” she said.

The cur­rent ap­proach to the en­force­ment of the False Claims Act has been a sig­nif­i­cant de­ter- rent for de­pos­i­tory in­sti­tu­tions do­ing FHA loans.

FHA lenders have be­come cau­tious in their un­der­writ­ing prac­tices due to the huge penal­ties the Obama Jus­tice Depart­ment levied on banks and non­bank mort­gage lenders for al­leged vi­o­la­tions of the False Claims Act.

Many banks stopped orig­i­nat­ing FHA loans due to the un­cer­tainty sur­round­ing the False Claims Act lit­i­ga­tion. To­day, non­banks “orig­i­nate 38% of all mort­gages and an amaz­ing 75% of FHA loans,” ac­cord­ing to a re­port by the in­vest­ment bank­ing firm Keefe, Bruyette & Woods.

Mayer Brown part­ner Lau­rence Platt told NMN that False Claims Act lit­i­ga­tion con­tin­ues to pose a threat to lenders.

“There are still False Claims Act cases out there and we’re in­volved in a bunch,” he said in an in­ter­view.

“We have had a cou­ple of new ones, too. The Jus­tice Depart­ment hasn’t gone away,” the Wash­ing­ton at­tor­ney added. “Hope­fully the new ad­min­is­tra­tion will be a lit­tle bit more busi­ness friendly.”

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