Long gone are the days that we threw FHA into the “New Sub-prime” bucket. When I first started originating FHA loans in 2005 everything was a “manual underwrite”. We boasted the fact that it was “make sense underwriting”. There were no computers or automated underwriting involved. Then, we went through a period where everyone came to spoil the party. The less knowledgeable individuals submitted “no doc” loans through the FHA system. The sad thing is that underwriters actually took the time to deny those files. Back then, FICOs could be as low as 500, or below in some cases, cash out to the maximum 97% loan to the value of the property, and debt to income ratios in the 60′s. The up front mortgage insurance premium (UFMIP) was less than 1 point and the monthly factor was less than 0.50. Max loan amount of $317,000 in the “high cost areas”.
Fast forward to 2011 and currently the underwriting standards have tightened up quite a bit. Minimum FICOs are in the 640-680 range, debt to income ratios not to exceed 50%, no cash out above 85%, but above all, you need the automated underwriting system to render the, oh so coveted, “approve/eligible” if you want to have any chance at getting the loan through. The cost of getting this loan has gone up, way up. Last year we saw the UFMIP reach 2.25 points and currently the monthly premium can get as high as 0.90% per month.
HUD recently announced that on April 18 the monthly premium will be as high as 1.25%. On a $250,000 the monthly premium has gone from $94 per month to the projected $260 per month in April. That is an increase of 277%!
Obviously, everything in the mortgage world has gone “risk based”. The number of defaults are out of control. The lack of “skin in the game”, with a low 3.5% down payment, gives very little reason for the homeowner to stay in their homes even with the damages incurred by a foreclosure in their credit report.
While this is is another blow to the recovery, it is a good thing for the long term survival of HUD. We all need to get back into a mode of taking a loan out to pay it back and not necessarily to stop paying rent.
