To much fanfare, FHA announced measures to better protect their insurance fund in a recent Final Ruling published in the Federal Register. Slipped in as a footnote to this announcement was a declaration that FHA is deaf to the concerns of the real estate industry. They are taking aim to again attempt to reduce the allowable seller paid closing costs. Make no mistake; they wouldn’t be doing this twice if they didn’t fully intend to see it through this time (regardless of industry feedback).
First, a little history (with a touch of nerdy stuff). On July 15th of 2010, FHA proposed to “cap the seller concessions in FHA-insured single family mortgage transactions at 3 percent of the lesser of the sales price or appraised value” after citing the industry norms of 3 percent for conventional loans and 4 percent for VA loans. They attempted to justify this by saying that high seller concessions encourages inflated appraisals (translation of what FHA was really saying: “appraisers are crooks that don’t know how to do their job and the lenders that we approve don’t know how to underwrite appraisals”) and then they came up with some stats I could have cooked up in my mom’s basement when I was in 8th grade and put them in a table (but they called it an actuarial table so that sounded cool and a lot of chumps bought it). Of course there was no mention that higher seller concessions come on smaller transactions and smaller transactions on the whole are done for those who are more vulnerable to serious economic turmoil (not that we’ve had any of that lately).
Immediately after they announced these changes, the industry pushed back. And when I say the industry pushed back, I mean everyone from builders to bankers to brokers to the National Association of Realtors®. HUD backed down and instead kept their focus on continuously raising the annual mortgage insurance premium. Now, in the face of a nearly imminent FHA bailout, they are acting on this again. Why? Will it really do anything to shore up how undercapitalized their insurance fund is? No. This is simply HUD and FHA bureaucrats making sure that they can say that they did something to avert the need for a bailout when it eventually comes. It’s nothing more than political CYA.
With this action, the collective costs of political cowardice will be frightfully transparent. The average credit score for FHA loans right now is 700. FHA’s mortgage insurance is currently 35% more expensive than the private market alternative. This proves that there is no actuarial basis for the current costs of FHA loans but rather, FHA is making their current customers pay for their poor decision making in the past in a desperate attempt to prevent themselves from having to face the political music come “bailout time.” To make matters worse, and this shouldn’t surprise us from what’s happened with the Social Security “trust fund,” congress is now using FHA as a piggy bank at the same time that is faces having to bail it out. And now we’ll face reduced seller concessions which with will force FHA purchasers on the more affordable end of the home buying spectrum into higher interest rates and do nothing to help the FHA insurance fund.
So if you end up taking a FHA loan and find yourself paying exorbitant mortgage insurance, a treasury override and not enjoying the historical program privilege of seller paid closing costs in excess of 3 percent, please know this: it has nothing to do with the risk you pose to the lender. It is only a consequence of actuarial and political failure.
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