Monday, October 19, 2009

No Rhyme, No Reason, FNMA/FHLMC & FHA Play Politics

Mortgage programs that make a lot of sense are rendered basically useless by unpublished and unofficial modifications.


A quick update on my recent “Spank Your Bank” post, which has been one of my most commented posts ever.  In no way did I mean to imply that the average worker at large banks should be held accountable for the cowardly/greedy actions of those in top management. 
Also, most smaller regional and community banks weren’t meant to be implied targets.  They are actually alternatives to the “too big to fail” elitist banks.
Nonprofits in Dire Need of Help
Before I get into the post I wanted to introduce my audience to two wonderful Detroit based nonprofits that could use your help.  Before you go hiding your wallet, Mariners Inn and Blight Busters are not asking for money (although they could always use more).  They’re both looking for donations of supplies and volunteers.
Mariners Inn is looking for auction items for its 21st annual River Rhythm fundraising event at the Roostertail on November 6.
Blight Busters needs office equipment and supplies.  They could also use volunteers to help redesign their website and build a social media presence.
Check them out, they’re both struggling to do great things in Detroit in the face of reduced government and corporate funding.
Of Politicians and Programs
By now, thousands of homeowners should be benefiting from refinances that allow them to lower their payments.  Lower payments mean fewer foreclosures, which supposedly is the goal of the Obama administration and many state governments.
This is one of the reasons that FNMA/FHLMC now offers programs that allow a homeowner to refinance even if they owe more than their home is worth.
FNMA/FHLMC already holds the mortgage and the corresponding inherent risk of any default by the homeowner, so why not lower that risk by allowing the homeowner to refinance to a lower payment?  Makes too much sense not to do!
HUD’s allowed that option on FHA loans for over 20 years with its Streamline Refinance program that didn’t require an appraisal or proof of income.
All that’s changing now.
HUD recently announced changes to its Streamline Refinance program effective November 18th, that will require homeowners to pay their closing costs or get an appraisal.  Also, a lender must certify employment and income, which means lenders will verify it.
FNMA/FHLMC’s first upside down refinance program worked pretty well.  It allowed a homeowner to refinance up to 105% of their property’s value with only a slight bump in the going interest rate.
They later rolled out a program allowing refinances on homes up to 125% upside down.  This program has a dismal track record though, as FNMA/FHLMC requires such a high risk premium (higher interest rate) that for most homeowners, the program doesn’t make sense. 
So, we’ve got potentially great programs that President Obama and many politicians point to as evidence they’re doing all the can to help struggling homeowners, when in reality the programs are set up for failure behind the scenes. 
I doubt anyone on Obama’s team has ever taken the time to do the math and analyze how these programs  work.  If they did, they’d quickly see how useless they were.
The most glaring example of this undercover manipulation of the lending system is FHA and credit scores.  Search all you want at, you won’t find anything in writing about the requirements of credit scores to be eligible for an FHA mortgage.
As I write this post though, most lenders now require a minimum credit score of 620 to qualify for an FHA mortgage.  Several have recently bumped that requirement up to 640.
What gives?
HUD is passing on it’s dirty work to lenders to avoid political backlash that’s what.  If HUD came out and publicly stated they were now requiring minimum credit scores, the political response would cost several HUD officials their jobs.  But, these same officials are also being grilled by politicians and Wall Street about HUD’s increasing mortgage delinquencies.  Fear is growing that the FHA program may need a federal bailout.  That won’t sit well with anyone, but leaves HUD officials between a rock and a hard place.  The only way to slow delinquencies and avert a bailout of the program is to do less riskier lending – but, that’s unpopular too. 
Politicians want votes, they don’t want to understand problems like this and have to make a decision that could hurt their career.
So, politicians are indirectly forcing HUD officials into a solution that “unofficially” puts pressure on lenders for doing loans with credit scores under 620. 
Since there’s no official announcement, no one has to take the blame for an unpopular course of action.  No one’s held accountable either. 
Avoiding accountability seems to be a popular survival strategy these days.  Unfortunately, it just leads to mediocrity or worse.
My Week Ahead
Tomorrow, barring a last minute cancellation, I’m supposed to have lunch with Senator John Pappageorge to discuss the housing crisis in Michigan and my thoughts on possible solutions.  I was quite surprised when his office called me about this.
Tuesday I’ll be having lunch with Jeff Ivory, a financial planner who’s made several recent appearances on CNBC’s Squawk Box.  Later I’m also getting together with a Leon Labrecque, a CPA and planner.
Thursday I hope to pop into LBN’s Fall Mixer and then head over to the Troy Chamber of Commerce’s Golden Anniversary event.
Friday morning I hope to attend Gerry Weinberg’s President’s Club.


  1. This is an amazing article. One that any broker should appreciate. I was excited about the release of the upside down mortgages only to find MI would be a problem and most lenders were backing off the LTV.

  2. Consider performance on those scores and the likelyhood that a lender can get adversley selected when they get a disporportionate number of the lower quality just because they will do them.

  3. This is a great article. I am very disappointed in the fact that no lender really does what the Refi Plus Programs were designed for out of fear. The government should have made it mandatory for all lenders to participate and close loans with MI.

    Carl The Seattle First Time Home Buyer

  4. the FHA is proposing specific credit policy
    changes that are largely focused on ensuring responsible lending and risk management for FHA approved Lenders. FHA’s capital reserve ratio is two percent mandated by Congress. With the FHA’s
    higher average credit scores and tighter credit policies, soon to be announced.

    To navigate Hud's new position Lenders have and will raize their credit score requirements on all FHA insured loans.

    The direction as I see it, is to
    1. model of the 80s program and the RTC
    2. FDIC's legacy loan program
    a. allow the new owners of the toxic debt
    to once and for all modify these
    homeowners so their debt to income ratio's are inligned for loan performance and not loan failure.

    With 1,2 above the financial institutions can 0 out their balance sheets and begin lending again. Secondary Markets become alive. Absent of results will continue a constant choke hold on our industry and those seeking home loans.

  5. Since nothing has been made official, how did you arrive at the informal 640 credit score "requirement?" I know you're good at your craft, and I believe you. I'm just trying to figure what I'm missing here.

  6. Chris, HUD & FHA have no official FICO score requirements. They're making the lenders do the dirty work of requiring them by auditing the he** out of closed loan files lenders send to HUD. After going through the ringer a few times, lenders get the message and raise FICO requirements. Flagstar & SunTrust are just two lenders among many (and more expected) to now require minimum 640 FICO for FHA loans:(

  7. We just got notice today that GMAC has raised their minimum FICO on FHA to 640.

    I actually don't disagree with the new FHA Streamline guidelines. The "new" formula is really the old formula. For the last few years lenders have been able to add costs, interest, inpounds, etc into the loan. I've seen FHA Streamlines where the borrower had $10,000 added to their loan for a .5% rate drop. VA may be worse, when VA borrowers, mesmerized by a rate under 5%, will pay 1 origination + 2 discount for minimal savings. FHA Streamlines will once again need to be closed as "no cost" deals, using YSP to cover closing costs for the borrower. This will result in an interest rate .5% higher than they would get if they could have added closing costs into the loan, but the actual monthly savings will not be much different. This should actually work out better for most borrowers, especially in the long run.