We are three years deep in the housing debacle. Why are we only just now considering raising the standards for FHA mortgage insurance?
For the next 30 days, HUD is seeking public comment on the following policy changes, each of which are designed to mitigate risk to the Mutual Mortgage Insurance Fund while promoting sustainable homeownership for FHA borrowers:
- Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.
- Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to three percent will bring FHA into conformity with industry standards.
- Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.
FICO score of 580 is being promoted as the new and more rigorous ticket to admission, the new gold standard. Insanity for someone to be able to get a mortgage with almost nothing --$7,000 on a starter shack costing $200,000-- down payment with a rotten credit record. And just how rotten is a 580 FICO score. Here's a chart from the Fair Isaac Corporation, the developer of FICO scoring:
|723||MEDIAN FICO SCORE|
|687||AVERAGE FICO SCORE|
580 indicates deadbeat status.
And, the second "tightening" indicates how meaningless even the 3.5% is. Through sleight of hand and over appraisal, the seller of a house that is getting FHA insurance for the buyer, can boost the selling price, then make a "contribution" to the amount the buyer has to bring to the closing.
This is crazy stuff , based on "standards" to promote sales of houses and condos that banks would never finance on their own without there being a big deep-pockets co-signer.
My dad wasn't doctrinaire about many things. But he from time to time intoned with uncommon solemnity and a deep voice: "Never Co-sign". Then he'd repeat: "Never Co-sign". "Never ever ever Co-sign".
The FHA in the past did a pretty good job of underwriting the mortgages they insured. Default rates were managed by not taking risks on people who had no business trying to get loans they were unlikely to pay back.
Didn't we learn that low downpayments are a recipe for disaster? Apparently not. The reason that government programs of FHA will not do more than the miniscule tweaking they are considering is that government is just about the only lender making mortgages.
We are so deep in the hole that we'll never get out.
So, that becomes Reason #3 why the Waukesha Water Utility Scheme to divert Lake Michigan water is toast.