It's big, it's hot, and it's all the rage–and chances are, you don't offer it. What is it? The FHA loan. According to a 2007 study by the Government Accounting Office, 10% of home purchases in 2008 will be Federal Housing Administration loans, a number that will rise by 50% in 2009.
As a credit union, you may not feel compelled to offer FHA loans. So far, you may not be strongly affected by the mortgage lending crisis swirling about the country. Why? For the simple reason that you make loans to members the old fashioned way, with attention to the member's ability to pay. Moreover, your members are still buying homes, refinancing them and making home improvements. They want mortgage loans. But even as an approved seller-servicer, the secondary market isn't flush with buyers and the Fannie Mae or Freddie Mac seal of approval on your loans may not be enough to ensure they are purchased by the wary investors.
If you're not offering FHA loans, the time is ripe to expand your offerings. Congress has just raised the limits (already as high as $729,750 for single-family homes in some high-cost areas), and they are federally-insured. The FHA even offers an attractive refinancing alternative for some borrowers caught in ugly adjustable-rate mortgages. Sounds like just the answer for a squishy market, and one that may help keep some members from losing their homes. Few things are more important to credit unions than helping members, so FHA truly bears looking into.
Recommended For You
But most likely, no one on staff knows what's involved in making an FHA loan and how it's different from conventional lending. This expertise shortfall is not strictly a credit union problem by the way, it is a problem throughout the mortgage industry. The FHA became somewhat irrelevant over the last decade, as it was just easier to make conventional loans. The need to charge an insurance premium, low loan limits and rigid underwriting rules made the typical FHA loan attractive to only a limited number of first-time home purchasers and those with not-so-good credit. Created in 1934, the FHA is an agency within the federal Department of Housing and Urban Development. The FHA doesn't make loans or buy loans, it merely insures them for a fee when they meet certain underwriting standards.
The most popular FHA program, especially among first-time homebuyers, has been the 203 (b) FHA fixed-rate mortgage. It sets debt-to-income ratios (generally about 29% for housing expenses) but has no minimum income requirements. Mortgage closing costs are contained under the program and remarkably, it allows loan-to-value ratios of up to 97%. The cost of FHA insurance is borne by the homebuyer, but annual premiums end after five years or when the LTV is 78%–whichever happens last.
Credit unions are eligible for FHA approval to originate Title II single-family loans and Title I home improvement loans as "supervised loan correspondents" or underwrite, originate, service and own FHA loans as a "supervised mortgagee." To qualify, credit unions should follow the application process found on the FHA Web site, http://portal.hud.gov.
The FHA offers lenders an online system–FHA Connection–to use in loan origination. FHA Connection includes a "Neighborhood Watch" feature that monitors FHA mortgage delinquency patterns to identify problems and unusual patterns involving FHA-insured loans. Loan limits vary by state and within communities in each state, but the up to date information is available online, too. Lenders can also take advantage of the automated underwriting systems using FHA's TOTAL Scorecard. Effective July 14, 2008, the upfront mortgage insurance premiums paid for all mortgages secured by one- to four-unit single-family properties will be based on the new risk-based premium structure, published in Mortgagee Letter 2008-16.
Don't assume that the FHA has changed its requirements just because the mortgage market has been dramatically altered. In order to obtain FHA insurance (and a better loan to sell in the secondary market), each loan must be documented in precisely the way FHA directs. Meeting those requirements includes a certification by a qualified underwriter under delegated authority or acceptance of the package for insurance by the FHA. HUD is serious about compliance and recently secured a civil money penalty and restitution of nearly $23 million against one lender for improper certifications.
Even though your credit union has a long history of working with Fannie Mae or Freddie Mac and the secondary market, a top-quality loan origination system or service provider is absolutely essential if you are going to offer FHA loans, especially if the credit union or its service provider haven't had much experience with them in the past. FHA's long-neglected loan insurance may be today's mortgage market darlings, but HUD's history of enforcement of the FHA underwriting requirements virtually guarantees that loans will be reviewed for compliance, even for lenders operating under delegated origination authority. The loan origination system, if designed with FHA in mind, can be a very important factor in entering this rapidly emerging market segment, with all of its positive ramifications for credit unions and their members.
Robert Shanklin is the senior vice president of NewDay Financial for secondary marketing and regulatory compliance. He may be reached at 877-423-1309 or [email protected]
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.
