FHA cancels plans for strict underwriting requirements

FHA rescinds strict credit restrictions

Critics said mortgage policy tilted the scales too heavily in favor of creditors

June 29, 2012 11:00AM

By Kenneth R. Harney

In a policy switch that could be important to thousands of applicants seeking low-down-payment home mortgages, the Federal Housing Administration has rescinded tough new credit restrictions that had been scheduled to take effect July 1.

The policy change would have affected borrowers who have one or more collections or disputed-bill accounts on their national credit bureau files, where the aggregate amounts were $1,000 or greater. Some mortgage industry experts estimate that if the now-rescinded rules had gone into effect, as many as one in three FHA loan applicants would have had difficulty being approved.

Under the withdrawn plan, borrowers with collections or disputed unpaid bills would have been required to "resolve" them before their loan could be closed, either by paying them off in full or by arranging a schedule of repayments. In effect, if you couldn't resolve the outstanding credit issue, you might not be able to obtain FHA financing. The rescinded policy would have replaced more lenient rules allowing loan officers to discuss the accounts with applicants, and determine whether they represented material risks that the borrower might fail to make the mortgage payments.

Disputed bills are commonplace in many consumers' files, but may not indicate serious credit risk. Rather, they might simply be a disagreement between merchant and customer over price, quality of the product or the terms of the credit arrangement. Open collection accounts are also common but tend to be viewed more ominously by lenders since they often indicate nonpayment over an extended period. Unpaid creditors frequently charge off unpaid accounts, then sell the files to collection agencies who pursue the customer and report nonpayments to the national credit bureaus - Equifax, Experian and TransUnion.

Critics of the policy complained that it tilted the scales too heavily in favor of creditors and disproportionately harmed FHA's traditional core borrowers - low- to moderate-income families, first-time buyers and minority groups. Other critics argued that the policy would not help FHA weed out serious credit risks since private lenders already are doing so by imposing their own credit score and other restrictions on applicants, known as "overlays" in the mortgage industry.

Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, Calif., noted in an interview that although FHA accepts FICO credit scores as low as 580 - FICO scores run from 300 to 850 with lower numbers portending higher risks of default - many large lenders require 640 scores or higher. Why? Because they are super-cautious in the post-bust marketplace and don't want to be required by FHA to "buy back" a mortgage that had a marginal FICO score at application, then went to foreclosure.

As it is, FHA's recent average scores are far higher than historical norms.

According to an analysis by Ellie Mae LLC, a company that tracks conventional and FHA loan originations, the average FICO score for an FHA-approved loan to purchase a house in May was 713. Though down slightly from March, when average FICOs for purchases hit 724, according to Ellie Mae, both scores suggest a strong trend toward financing applicants who have relatively fewer issues in their credit files. This contrasts with the agency's long-standing tradition of helping "low to moderate wage earners and the underserved" - often minorities - to buy homes, says Ziroli. During much of the last decade, FHA routinely financed borrowers with credit scores in the low to mid 600s.

Deputy Assistant Secretary Charles Coulter says the FHA's ongoing interest in re-evaluating its credit policies - such as the rescinded collections and disputes rule - is "to find a balanced yet flexible approach to promote access to affordable credit while protecting the mortgage insurance fund."

FHA plans to issue a new rule "soon," agency sources said, that addresses collection accounts and disputes separately rather than lumping them into a single standard. Meanwhile if you plan to apply for an FHA loan and you think you have collections or disputes on file, here's the good news: You won't be forced to pay off or resolve the accounts before closing, but you are likely to have your application referred for "manual" underwriting, where a loan officer takes a hard look at the facts and circumstances of your collections or disputed accounts. This, in turn, will almost certainly slow down your approval. There are exceptions, according to the agency, such as when the disputed account is both less than $500 and more than 24 months old.

But beware lenders' overlay practices. They may get you turned down even if FHA's more generous rules say you are acceptable.

Adam Simmons
Crystal Clear Mortgage
888-634-6911 toll free
adam@crystalclearmortgage.com

Are too low valuations preventing some markets from recovering?

June 22, 2012 01:00PM

By Kenneth R. Harney

One-third of realtors are reporting problems with appraisals.

Are some appraisers failing to see the improvements in real estate values underway in local markets that have recently bottomed out? When multiple bids push a house price thousands of dollars above what the seller is asking — not unusual in neighborhoods where demand is particularly robust — are appraisers still coming in with values below the agreed-upon contract number?

Yes. Growing numbers of mortgage loan officers and real estate agents say appraiser reluctance to report local appreciation is complicating sales transactions. In a new poll of its members, the National Association of Realtors found that 33 percent of them reported appraisal problems during the month of May. Moe Veissi, president of the association, said poor appraising “in markets that are no longer in decline is the single most important” valuation obstacle “to seeing a real recovery.”

Even appraisal experts concede that this is a troubling issue. Frank Gregoire, former chairman of the Florida Real Estate Appraisal Board and an appraiser in St. Petersburg, says that many appraisers are reluctant to make the upward adjustments they know to be justified by recent positive appreciation trends because they fear criticism that they are potentially overvaluing the property — exposing lender clients to costly “buy-back” demands by Fannie Mae or Freddie Mac, or future litigation.

“Even if they have the (local) data to support” adjustments reflecting positive trends that affect value — pending home sales and new listings of similar houses at higher prices, for example — “they take the easy way out” and go with a lower valuation so as not to upset hyper-cautious reviewers at the appraisal management companies that now control the bulk of all home real estate appraisal assignments, Gregoire said in an interview.

One appraiser in his area recently assembled strong supporting data to make an upward adjustment to a valuation based on recent sales activity on comparable houses. When he delivered the report to the appraisal management company that hired him, however, an official at the firm sent it back immediately with instructions to “revisit” the upward adjustment — in reality, to get rid of it.

Joseph Petrowsky, owner of Right Trac Financial Group Inc., a Manchester, Conn.-based mortgage company, says too often valuations in upward-trending markets “aren’t catching up with the new values, let alone a property that was involved in a bidding war.” He cites a series of recent loan applications where the appraisal was thousands of dollars below the agreed-upon final contract price, endangering or blowing the deals. In one case, the buyer signed the contract at $312,500 but the appraisal came in at just $280,000, despite readily available evidence that the local market has experienced appreciation in recent months.

“Appraisers are scared to death” to report rising values, said Petrowsky. “I talk to them and they are beside themselves. They feel they have to [deliver] appraisals they know should be higher.” Much worse, though, is the impact on sellers and buyers. When an appraisal comes in much lower than the mutually agreed-upon contract price, the buyers typically need to revise their loan request by increasing the down payment — that may not be feasible — or renegotiating the contract price with the unhappy seller.

Dennis Smith, a co-owner of Stratis Financial Corp. in Huntington Beach, Calif., says the problem is magnified when the appraiser assigned by the management company travels from 30 or 40 miles away, and has no insights into neighborhood appreciation trends that may be relatively recent. He cited an example where a client saw a bidding war — four offers that pushed the contract price from the listed $350,000 to $375,000 — but the out-of-town appraiser would not take this into consideration in arriving at the final valuation.

Sara W. Stephens, president of the Appraisal Institute, the largest association in the industry, says it is every appraiser’s professional duty to arrive at valuations that “reflect the market,” including recent changes — whether positive or negative, if they can be verified with authoritative and accurate data.

How can buyers and sellers guard against the see-no-appreciation problem? Tops on the list: Make sure the real estate agents on both sides of your transaction have assembled accurate data on “comparable” sales or pending sales that demonstrate how the market has changed in the past six months or less. Then make sure the appraiser sees the data.

Your purchase or sale doesn’t have to be jeopardized simply because the appraiser doesn’t have — or chooses not to collect — all the relevant recent facts.


Adam Simmons
CrystalClear Mortgage
www.Crystalclearmortgage.com
936-447-5626
adam@crystalclearmortgage.com