The Federal Housing Administration [1] (FHA) issued its "Blueprint for Access [2]," which aims to expand credit access for underserved borrowers by utilizing housing counseling as a means to reduce the possibility of loans becoming seriously delinquent. The announcement highlights a new pilot program, Homeowners Armed with Knowledge (HAWK), which incorporates housing counseling into the home buying process for borrowers using FHA-insured financing.
The agency cited a study from the Urban Institute [3] that notes that the average loan from Freddie Mac and Fannie Mae has a borrower's credit score of 752, leaving 13 million borrowers with credit scores between 580-680 at a significant disadvantage when attempting to secure loans.
Under the new pilot, homebuyers will qualify for savings on their FHA-insured loans by completing housing counseling through independent, non-profit organizations. The counseling is intended to improve buyer's budgeting skills and housing decisions.
According to the FHA, housing counseling lowers the rate of seriously delinquent loans in first-time buyers by 29 percent. Overall, housing counseling lowers delinquency rates by 15 percent.
"This is a win for families, FHA, lenders, realtors and the overall market, which is why we are very excited about its potential impact," said Shaun Donovan, secretary of HUD. "We want to create an environment that encourages responsible behavior and provides clear rules of the road so lenders can originate loans without fear of unanticipated consequences. We want lenders to be able focus on the quality of their processes and lend to all qualified borrowers."
Under the four-year HAWK pilot program, homebuyers who commit to housing counseling will qualify for savings on their FHA-insured loans. The average buyer would save roughly $325 a year, or almost $9,800 over the life of the loan, according to FHA.
The FHA proposes that homeowners who complete housing counseling before signing a contract to purchase a home and who complete additional pre-closing counseling will receive a 50 basis point reduction in the upfront FHA mortgage insurance premium (MIP) and a 10 basis point reduction in the annual FHA MIP. Homeowners, if current after two years with no serious delinquencies, will receive an additional 15 basis point reduction in the annual MIP through HAWK.
However, not everyone believes that the FHA's efforts are necessarily in the best interest of homeowners.
Edward Pinto, resident fellow and co-director of the American Enterprise Institute's [4] International Center on Housing Risk, thinks the recent moves by the FHA could create more problems in the future.
"FHA has not stood for sustainable homeownership for at least five decades. It has failed in that regard. As evidenced from 1977 to 2012, one in eight FHA families ended up having a claim for insurance due to foreclosure or insurance from events that left the family's dreams shattered," Pinto said.
He continued, "The direction that both FHA and FHFA are going, based on their announcements, is to move the mortgage market down the slope of greater risk, with more unsustainable loans."
Furthermore, Pinto believes that the last time underwriting standards created a safe and stable lending environment were in the early 1990's.
"Qualified borrowers are underserved, yet the FHA qualified mortgage rules are extremely broad and deep. Much of that credit box the FHA falsely describes as credit worthy, given their underwriting standards, are putting borrowers in harm's way by putting them in unsustainable loans," Pinto said.
Carole Galante, FHA commissioner, thinks the new programs can be transformative for homebuyers across the entire range of credit scores.
"FHA's mission is to make sure that there is access to affordable mortgage credit for underserved borrowers and communities," Galante said. "Our blueprint to expand credit access outlines the steps we are taking over the next few months to make that happen. These programs transform the way we do business, make us a better partner, and help reduce risk across the market."