The U.S. Department of Housing and Urban Development’s recently announced that an independent actuarial review of the FHA Mutual Mortgage Insurance (MMI) Fund found that the Fund’s capital reserve ratio has fallen to -1.44%, which represents a negative economic value of $16.3 billion. In the wake of this announcement, HUD unveiled a series of aggressive steps it intends to take over the next several months. According to the Annual Report provided to Congress earlier this month, FHA lenders will have to contend with several policy changes to FHA origination and servicing requirements in the coming year, as well as to the Home Equity Conversion Mortgage (HECM) program.
Unlike the proposals we discussed in a blog posting earlier this week, “FHA Issues Annual Financial Report to Congress,” the anticipated policy changes below can be accomplished by HUD without the need for Congress to enact legislative changes. While certain of these changes, such as the expansion of loss mitigation options, may help existing FHA borrowers by providing more options to avoid foreclosure, others, such as the drastic changes announced for the HECM program, may restrict access to credit for potential new borrowers. In any event, FHA mortgagees that originate and/or service FHA-insured loans need to be on the lookout in the coming months for announcements from the Department that provide insight to these planned policy changes. As with HUD’s recent announcement regarding changes to its loss mitigation requirements, HUD will expect quick action by FHA-approved mortgagees to implement these policy amendments and strict adherence to the amended policies once they become effective. Below we summarize what to expect from HUD in these areas.
Changes Designed to Reduce Losses. The Annual Report listed several proposals designed to reduce losses in the MMI Fund through enhancements to its default servicing and conveyance policies. These plans include:
1. Re-Designing FHA Loss Mitigation Options to Better Assist Delinquent Borrowers. HUD did not waste any time implementing this proposal. On the same day that the Department issued the Annual Report to Congress, it issued Mortgagee Letter 2012-22, announcing revisions to FHA’s Loss Mitigation home retention options. These revised standards will streamline the FHA loss mitigation process and create concrete eligibility parameters for each loss mitigation option. The Department also adjusted its loss mitigation eligibility criteria to expand greatly the population of borrowers who may qualify for the revised loss mitigation options.
With these revised loss mitigation requirements, HUD hopes to reduce foreclosures and, as a result, claim costs for FHA by creating sustainable payments for borrowers so they can retain homeownership. The challenge for FHA servicers will be implementing such sweeping changes, which will require software upgrades, new policies and procedures, and employee training, in the short time period allotted by HUD. The loss mitigation changes announced in Mortgagee Letter 2012-22 must be implemented no later than February 16, 2013.
2. Streamlining FHA’s Short-Sale Requirements. HUD will introduce a streamlined pre-foreclosure sale policy aimed at removing certain barriers for borrowers to obtain a short sale of the property securing an FHA-insured mortgage. While the details have not been announced, the Department anticipates that these changes will permit borrowers a more “graceful exit” through a short sale rather than a foreclosure and reduce losses to the MMI Fund, as short sale claims are typically lower than traditional claims involving the foreclosure and REO processes. In 2013, FHA will also launch a large-scale proactive marketing campaign to promote modifications and short sales for delinquent borrowers.
3. Expanding Alternatives to the REO Disposition Process. HUD announced plans to expand a pilot program conducted over the past year in which properties securing non-performing FHA-insured loans were sold to third party purchasers by the lender after foreclosure without ever being conveyed to FHA. The Department anticipates that this disposition method will yield lower losses than the traditional REO disposition process by eliminating HUD’s REO property carrying costs.
Proposals to Strengthen Loan Quality and Improve Revenue. In the Annual Report, HUD also announced plans to implement new policies aimed at strengthening the quality of new FHA loan originations to ensure the long-term health of the MMI Fund. The Department’s plans for 2013 include:
1. Revising the Premium Cancellation Policy. HUD plans to amend its policy of cancelling required mortgage insurance premiums (MIPs) on loans for which the outstanding principal balance reaches less than 78% of the original principal balance. Beginning with new loans endorsed after the policy change becomes effective, which HUD anticipates will occur later in the 2013 fiscal year, FHA will collect MIPs on FHA-insured loans for the entire period during which they are insured. This policy change will significantly increase revenue to FHA; however, it will also significantly increase the cost of an FHA-insured loan for borrowers.
2. Increasing Mortgage Insurance Premiums. As with past initiatives to shore up the MMI Fund and reduce FHA’s market share, in the coming year, FHA announced that it will increase annual mortgage insurance premiums by 10 basis points. HUD estimates that this premium increase will result in a modest $13 per month increase for the average FHA borrower.
3. Implementing a Housing Counseling Incentive Policy. FHA intends to develop new policies that will either provide incentives to borrowers or in some cases require borrowers to complete a pre-purchase housing counseling program when purchasing a home using an FHA-insured loan.
Anticipated Changes to the HECM Program. Finally, in response to the substantial stress on the MMI Fund posed by the HECM program identified in the independent actuarial study, the Annual Report states that HUD will be forced to “make blunt changes to the program” in the short term. HUD will also pursue long-term legislative and regulatory changes to the HECM program. These short-term and long-term changes include:
1. Immediate Steps to Reduce Losses in the Short Term
• Reducing the amount a HECM borrower is permitted to draw at origination to reduce defaults due to nonpayment of property taxes and insurance.
• Consolidating the Fixed Rate Standard program with the Fixed Rate HECM Saver product, which will result in a reduction of the maximum amount of funds available to a HECM borrower.
• Making across-the-board reductions to the principal limit factors that are used to determine the maximum amount a homeowner may borrow using the remaining HECM products (i.e. Fixed/ARM Saver, ARM Standard).
• Creating new incentives for estate executors of HECM borrowers to dispose of properties themselves rather than conveying them to HUD, which will reduce property management, maintenance, and marketing costs associated with the REO disposition process.
2. Longer-Term Changes to Permanently Strengthen the Program
• Limiting the draw at origination to mandatory obligations, such as closing costs, mortgage liens and federal debt.
• Requiring a financial assessment of borrowers as a basis for loan approval and determining the suitability of various HECM products.
• Establishing a tax and insurance set-aside to ensure sufficient equity or an annuity is available to pay taxes and insurance.
This lengthy list of upcoming changes, along with the legislative proposals discussed in our earlier blog posting, demonstrates how serious the Department is in amending its policies to ensure greater financial stability of the FHA program. This initiative will include efforts by HUD to ensure FHA-approved lenders and servicers comply with existing and new requirements. It is imperative for all participants in the FHA portfolio to follow developments by HUD and implement these anticipated changes as they are unveiled over the coming year. We will continue to keep you informed as these changes occur.