Richard's Real Estate Thoughts: HUD and FHA believe lower seller concessions are needed to maintain reserves

Last week FHA announced the beginning of the comment period about the anticipated change to reduce seller concessions

FHA announced began to discuss publicly back in December several considerations to tighten guidelines. The stated goal was to restore FHA capital reserves and to ensure that FHA financing was not at risk again because of large numbers of defaults. Capital reserves had fallen below mandated levels with great publicity.

Specific items included:

•·         Increased scrutiny on the FHA loan portfolio

•·         Effective measures against lenders with excessive default ratios

•·         Increase mortgage insurance premiums

•·         Improvements in appraiser independence

•·         Tighter approval guidelines

•·         More upfront investment from home buyers

Several of these changes were announced in January with more detail provided in a March statement. Here is a copy of the March statement from FHA Commissioner David Stevens. The details of the plan to restore FHA capital reserves were laid out in a May with the Commissioner's prepared testimony to Congress. All of these changes, including the reduction of seller concessions, are proclaimed as necessary to restoring and protecting the FHA capital reserve, as essential to maintaining an FHA mortgage program.

HUD/FHA explains their goals and understanding about the actions needed to sustain FHA loan program

In an NPR interview from December 2009, HUD Secretary Shaun Donovan mentioned "it's also important that we not pull back too far, which could blunt these early signs of housing recovery that we've seen."

In my mind we have already pulled back too far and are facing a housing double dip recession, despite the now expired tax credits and the historically low interest rates.

Secretary Donovan specifically stated his insights in the linked NPR interview - "we are going to require a somewhat more skin in the game from our borrowers to ensure that if we do get another decline in the market ahead of us, that we don't see foreclosure rates and delinquency rates rise in the FHA portfolio from where they've been."

Skin in the game

Many in Congress think along these same lines - that there would be less foreclosure if people invested more of their money - more skin - into their purchases. More skin has become a mantra that our representatives and regulators find much pleasure in reciting.

If we are going to change minds with this comment period, this conviction that the Secretary and many in Congress have needs to be understood. The belief that more skin from homebuyers is needed to keep FHA home financing away from future massive delinquencies.

We need to remember that HUD and FHA are armed with many studies and that they, and Congress, believe they have fully documented that delinquency increased with lower upfront investment and increased seller concessions.

"Experience to-date on loans insured from FY 2003 to FY 2008 suggests that claim rates on high-concession loans are 50 percent higher or more than those on low-concession loans."

The perspective from HUD and FHA is that seller concessions must be lowered in order to protect the FHA program.

Effective comments needed to change minds in HUD and Congress about changes to seller concessions and other FHA guidelines

Several points can be made to counter these conclusions by HUD regulators and some in Congress.

One point that I am discussion in this post is that the reduction to 3% will only hurt people buying lower priced residences - the middle income working class who might buy a $100,000 home.

To understand how this works, let's look at a hypothetical example. A typical amount of set closing costs might be around $3000. This covers mostly fixed fees for the appraisal, the lender underwriting/processing fee, the title attorney, title insurance and the recording taxes.

This amount is basically the same regardless of the loan size, and are the standard fees before any money is paid for the loan origination and processing. The fee for origination and processing can vary but probably averages to 1% of the loan amount.

The $3000 in costs also does not include any amount for home owner insurance and property taxes which will be escrowed with an FHA loan.

Considering only the $3000 fixed costs, without origination and T/I escrows, the costs that are the basically the same regardless of loan size.

Without a doubt the 3% restriction prejudices against the lower loan sizes.

With a $200,000 loan amount, the 3% seller concession more than covers the fixed closing costs, plus the origination fee and the amount necessary to set up T/I escrows.

With a $100.000 loan amount, the 3% seller concession will only cover the basic fixed amount of closing costs, with nothing left for the origination fee or for the T/I escrows.

With a $75,000 loan amount, forget about it. That buyer must pay up. The message is we need your skin if you are buying a lower priced home.

The new guideline hurts only buyers purchasing lower priced homes. It does not impact the larger loan sizes.

This seems to work directly against the FHA mission.

Will comments have an impact on HUD policy makers?

The comment period seems to be window dressing, a token concession to a mandatory procedure. The decision has been made, and was made last year. To quote from the NPR interview, "effectively what that means (more skin in the game) is that they would need to bring more cash to the closing table upfront. We're looking at exactly the way to do that and, again, to try to ensure that we're limiting the riskiest borrowers in our programs. So we'll announce by the end of January exactly how we're going to do that."

I will write more points in later posts. We need to change the made up minds of the policy makers. Comments, to be effective, must address directly the convictions and goals that the Secretary has publicly stated. There were many comments about the now lost seller funded down payment assistance. There were many comments about the RESPA changes. No effect. There will be many comments about the reduced seller concessions. The question is will there be an effect from those comments.

FHA and Congress have already decided to require more skin, especially from lower income buyers. Our comments must change minds that are made up.

Here is the public notice for the proposed changes.

Here is the HUD press release about the comment period.

Here is the link to comment on the proposed changes to seller concessions for FHA home purchase loans.

FHA, VA, Rural Development, Conventional, Jumbo,
Reverse Mortgages, FHA 203k Renovation

Home financing in Tennessee and Georgia.

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