From Michael Vitale, Sr., Chief Compliance Officer:
FHA business is down (FHA Loans) partly because their premiums are up and partly because Lenders are worried about penalties from immaterial underwriting issues.
FHFA (the agencies) wants lenders to originate and sell them more loans made to low and moderate income home buyers and now FHA says the average credit score (680) of loans being insured indicates many low and moderate income home buyers may be blocked from home financing.
What’s a lender to do? In the past when lenders answered the bell and originated more risky loans (as requested and sometimes required) to increase the market share of low and moderate income home buyers, we ended up with massive losses from buy backs, penalties and settlements.
Now, the agencies and FHA are worried that low and moderate income home buyers, with low credit scores, aren’t getting access to adequate mortgage financing. Can you say “ability to repay”? The agencies recently revamped the requirements and QC process to provide lenders some relief, FHA is doing the same by, what they say, is providing clearer underwriting guidelines to help lenders avoid defects.
But in the end, if a loan defaults who is going to pay. Loans with lower credit scores, high LTV (FHA) and a higher DTI ratios (usually associated with low and moderate income buyers) are more likely to default. Lenders need to tread very cautiously if they decide to originate such loans, either for sale to the agencies or insuring by FHA.
With all that goes on in the loan approval process, an auditor doesn’t need to dig too deep to find a defect.
The questions are:
How will the existence of this defect affect the loan’s performance?
More importantly, how will it be viewed by FHA or the agencies?
Are we doomed to repeat history?
Be careful my friends.