FHA Risk Based Pricing - IBP
FHA Risk Based PricingJanuary 24, 2008Real Estate Finance
Federal IssuesThe following is for study only and has NOT been approved bythe Real Estate Finance Committee or the Board of Directors.Issue:
Should C.A.R., in conjunction with NAR, modify its existing policy on risk-based pricing for the FHA mortgage insurance programs so it:- Does not disadvantage the market FHA was designed to serve,
- Does not rely solely on FICO scores but considers compensating factors,
- Does not mandate a specific down payment for purchase borrowers, but insteadadjust pricing based on down payment and loan-to-value ratio, and
- Does not use risk based pricing models to qualify borrowers?
Action:
Action requested at this time so staff may address this issue when the FHA reform bills goe to conference.Choices:
1. Take a “Support” position
2. Take an “Oppose” position
3. Take a “Neutral” position
4. Take a “Not Real Estate Related” position
5. Take no action
6. OtherSummary: On September 20, 2007, HUD issued a Notice of a planned implementation of risk-based pricing for FHA mortgage insurance premiums. Congress had been debating this issue, and it was thought an act of Congress was needed for FHA to implement risk-based pricing. However, HUD believes they have the authority to implement risk-based pricing for FHA mortgageinsurance.Background: REALTORS® have been working with HUD and Congress to implement risk-based pricing for FHA mortgage insurance for the last three years. However, risk-based pricing provisions in the proposed legislation differs dramatically with that put forth by HUD in the Notice.Risk-based pricing, as proposed within the legislation should allow FHA to balance the mortgage terms and borrower’s finances when calculating the upfront and monthly premiums. This means taking into consideration the income, assets and financial profile of the borrower as well as the loan-to-value (LTV), loan period, fees and amortization schedule of the loan product. Presumably, this should allow the FHA to tailor products to borrowers’ specific financial circumstances. An example is a borrower with a small amount of cash to put down on a mortgage, but shows a strong monthlyincome. For this home buyer, the FHA may charge a lower upfront premium but with a higher annual renewal.Prior to 2002 when the most recent housing boom increased home prices at a dramatic rate, FHA was the last resort formany home buyers and home owners before going to the subprime market. Many of the home owners who utilized FHA did so because they lacked sufficient credit history, had poor credit, and/or less than 20 percent to put down. FHA currently charges an upfront premium of 1.5 percent and a 0.5 percent annual premium, with a three percent minimum down payment requirement. HUD, under their notice, will define risk-based premiums based on a borrower’s credit score and down payment. Outlook: Sue to the negative reaction from Congress to the Notice, HUD is delaying the implementation of their rule. The House bill includes a provision to create risk-based pricing for FHA that is supported by the REALTORS®. The Senate bill does not include risk-based pricing for FHA. Whether or not FHA should be allowed to utilized risk-based pricing and what it will look like will be discussed in conference. A one-year moratorium is likely, while the GAO studies the issue further.NAR Policy: At the November 2007, business meetings, NAR took the following position.That NAR modify its existing policy on risk-based pricing for FHA mortgage insurance programs (see italics for amended language:That NAR support risk-based pricing for the FHA mortgage insurance program that does not disadvantage the market FHA was designed to serve. FHA should not rely on FICO scores for risk-based pricing but also consider compensating factors. FHA should not mandate a specific downpayment for purchase borrowers, but instead adjust pricing based on downpayment and loan-to-value ratio. In addition, risked based pricing models should not be used to qualify borrowers.Rational: On October 22, 2007, NAR responded to a HUD notice announcing a new risk-based pricing scheme for FHA. NAR’s existing policy supports risk-based premiums, but the Committee (Federal Housing Policy) had concerns with the structure announced by HUD in its notice. The proposed regulation narrowly defines risk-based premiums as a borrower’s credit score and downpayment. The Committee believes risk-based premiums primarily tied to credit scores will negatively affect the availability and affordability of FHA insurance for a number of borrowers. Borrowers with insufficient trade lines to generate credit bureau scores will be unfairly burdened. According to a Government AccountabilityReport (GAO), if the proposed pricing structure were used in 2005, 37 percent of borrowers would pay more for FHA insurance and 20 percent would not have qualified at all.C.A.R. Policy: In 2006, C.A.R. took the position to “SUPPORT” legislation to allow the Federal Housing Administration (FHA) to set their mortgage insurance premiums using risk-based pricing, so long as the legislation includes:- Increasing the FHA loan limits to100% of the conforming loan limit,
- Insuring zero down mortgages, and
- Insuring 40 year mortgages.
Should C.A.R., in conjunction with NAR, modify its existing policy on risk-based pricing forthe FHA mortgage insurance programs so it:- Does not disadvantage the market FHA was designed to serve,
- Does not rely on solely FICO scores but considers compensating factors,
- Does not mandate aspecific down payment for purchase borrowers, but instead adjust pricing based on down payment and loan-to-value ratio, and
- Does not use risk based pricing models to qualify borrowers?
