FHA Loans Outgrow Their Stigma, See Rising Demand
Many credit unions remain trapped between rising consumer and member demand for mortgages backed by the FHA and HUD regulations governing those loans.
The FHA does not make loans. The agency issues insurance that protects lenders from losses if the borrowers default. Historically, the loans allowed many homebuyers to purchase their first homes and were widely seen as almost a holdover from the programs put into place during the 1930s.
As a result, FHA-backed loans spent most of the housing bubble as the ugly children of a union between a government authority and the early housing market. They sometimes carried a stigma from being associated with a program meant to help low-income borrowers when growing numbers of lenders considered those borrowers the best customers for their newfangled subprime loans. Further, FHA-backed loans also came dressed in engulfing cloaks of confusing and sometimes contradictory federal rules and regulations. And they seemed to have lost their foundational reason to exist. After all, if home prices were widely seen as perpetually rising and continuing refinancing, who needed insurance against default?
But home prices stopped rising after a while, and in the wake of the bursting bubble FHA loans recovered some of the original luster. As lending vanished from many communities, FHA-approved lenders were sometimes the only ones with underwriting standards flexible enough to account for diminished resources, sliding credit scores or the need for a loan or gift from family or friends to make a down payment or pay the costs to close a housing loan. And even after HUD tightened some of the FHA's rules, borrowers still usually found it easier to qualify for FHA-backed loans than those backed with conventional mortgage insurance or without any insurance at all.
"We have offered FHA loans for years and consider them a significant and rising part of our overall mortgage lending," said Jon Paukovitch, senior vice president of mortgage lending for the $3.1 billion Ent Federal Credit Union, headquartered in Colorado Springs, Colo. "We have a community charter and consider FHA loans to be a significant part of our ability to serve all our communities," he added.
Paukovitch cited the FHA underwriting benefits as why the loans have remained popular with members, but he said FHA's ability to allow mortgage loans for almost 97% of the home's price was among the strongest.
"It's very rare to find any conventional mortgage insurance that will allow you to make 97% LTV loans," Paukovitch said. And this means FHA loans can, on average, be a bit higher, carry a slightly lower interest rate and slightly lower insurance costs that will make them overall less costly with borrowers and more popular.
In addition, FHA underwriting rules allow lenders to take other payment history, such as rent and utilities, into account when underwriting loans FHA will insure as well as other factors that first-time or lower income borrowers may find helpful.
Paukovitch said roughly 15% of Ent's loan volume came from FHA-backed loans and that he expected the proportion to increase over the short to medium term.
Linda Clampitt, senior vice president with CU Members Mortgage, agreed.
"We expect FHA loans to be a growing part of the overall CU loan origination portfolio going forward," she said. "Particularly as interest rates rise, which we expect they will and underwriting continues to tighten."
CU Members Mortgage is a mortgage lender owned by the Colonial Savings Bank, a privately held $1 billion bank headquartered in Fort Worth, Texas. It has more than 1,000 credit union clients, many of which have turned to the firm for help negotiating FHA-backed lending.
Clampitt acknowledged that credit unions face the combined pressures of having more members seeking FHA-backed loans and HUD's tightened regulations.
"In an odd way what they have done has been to eliminate the middle ground," Clampitt said.
Under previous rules a credit union could be in the middle of the road with an FHA-approved partner like CU Members Mortgage as something called a loan correspondent, Clampitt explained. Under those rules, loan correspondents could fund FHA-backed loans and have a bigger role in the underwriting of the loans as well as make money from originating them.
That largely went away under the new rules that locked loan correspondents out of FHA Connection, a key online part of FHA's loan underwriting process, and forbade them from closing loans in their names. Now, loan correspondent institutions can only close FHA-backed loans in the names of their fully FHA-approved lending partner.
"I am fairly certain that this was not an intended consequence of the rules change," Clampitt said. "But it is an unintended consequence that we have to live with, at least for the time being," she said.
The only alternative a credit union might have to loan correspondent status would be to become a fully approved FHA lender, a goal that would likely remain beyond the grasp of many CUs that lack staff with enough experience to qualify as direct endorsement underwriters. Every fully approved FHA lender has to have at least one DE underwriter on staff, and Clampitt reported they are expensive to find and hire.
But even more than regulations, one of the key barriers to FHA lending that credit unions might face is the decision to move from refinancing mortgages to originating them. Refinancing has traditionally provided the bulk of credit unions' mortgage business, but mortgage authorities such as the American Credit Union Mortgage Associations have long maintained that long-term mortgage growth for CUs rests in originating mortgages more than in refinancing them.
ACUMA Executive Director Robert Dorsa stressed that marketing mortgages to CU members who generally love their credit unions but who don't associate them with mortgages may be key.
"It's almost as though we are offering credit unions' members a new service, even though CUs have been offering mortgages for years," he remarked.