In this month’s update: gain insights into the latest updates on mortgage interest rates, get a quick refresher on FHA vs. Conventional loans, learn about what’s going on with the surging wave of loan repurchase requests, and more!
FED Pauses Interest Rate Hikes - At Least for the Moment
Mortgage rates (which had been trending down in May) reversed course in the second half of last month and in the beginning of June climbed back up to nearly 7%. As of June 22, for example, Freddie Mac reported the average 30-year mortgage rate was 6.67%. All eyes were on the Fed’s June meeting when, in the first time in 10 consecutive sessions, the central bank did not, repeat did not, raise rates. However, Fed watchers now expect, based on Chairman Powell’s recent remarks, that there may be one more rate hike coming most likely in the July session.
FHA or Conventional Loans: A Quick Refresher
The two most popular loan programs when applying for a purchase loan are FHA and conventional. Both types of loans help borrowers achieve their dream of homeownership but there are some key differences that borrowers should understand. The biggest differences between FHA and conventional are the down payment requirements, credit scores, and mortgage insurance cancellation.
FHA only requires a minimum down payment of 3.5% of the purchase price while conventional loans typically require a down payment of at least 5%. In terms of credit scores, FHA loans are more lenient accepting scores as low as 580 versus the GSEs’ minimum of 620. FHA loans require both an upfront mortgage and annual Mortgage Insurance Premium (MIP), while conventional loans require private mortgage Insurance (PMI) if the borrower puts less than 20% down. Also, PMI can be cancelled once the borrower has paid down the loan to 78% of the original purchase price whereas MIP on FHA loans is usually required for the life of the loan, until the loan is paid off or the property is sold. Even with this restriction, FHA might be the better option for many borrowers, especially a first-time homebuyer with a smaller down payment, due to the lower MIP that was recently introduced for FHA loans.
Repurchase Uptick Brings Larger Losses
Independent mortgage banks have been dealing with a surging wave of loan repurchase requests from Fannie Mae and Freddie Mac that represent threats to lenders’ stretched balance sheets. Much of the problem stems from the high volume of low-rate loans originated in 2020 and 2021 when the industry was working to build out capacity to deal with explosive origination growth. That capacity issue may have resulted in a higher rate of underwriting errors that Fannie and Freddie are still uncovering as part of their ongoing quality control checks. There are concerns that Fannie and Freddie have been too aggressive in pursuing the repurchase option on loans with minor underwriting defects that could be cured far short of a complete buyback demand. The Mortgage Bankers Association is currently in discussion with the agencies over that concern. Many mid-sized non-banks don’t have the ability to hold repurchased loans on their books and may have to turn to the whole loan market to sell them which might be at a loss due to the previous lower rate environment. In late March, Community Home Lenders of America (CHLA) sent a letter to FHFA asking to establish requirements to adopt a uniform policy of offering an indemnification in lieu of repurchase demands for all performing loans. The average loss on a repurchased loan has never been higher than it is today – an average of 30% on every loan repurchase or $100,000 loss on a $300,000 loan. Many of the defects that lead to repurchase include excessive debt to income ratios, appraisal issues, missing documentation, employment verification and undisclosed liabilities —all items that our FraudGuard® solution checks for.
The Mortgage Collaborative Podcast - Repurchase & Affordability Conversation
The Mortgage Collaborative (TMC) is a network of more than 100 companies that include independent mortgage banks, banks, credit unions and mortgage service providers working together to improve their business and the mortgage industry. On its recent “The Rundown” podcast, TMC’s new president, Melissa Langdale joined to discuss affordability and the uptick in repurchases. She noted that on the affordability issue, Freddie Mac is working on a solution to add affordability findings specific to first-time homebuyers and down payment assistance programs to meet affordability goals. Langdale mentioned that this tool will help assist lenders on what specific purchase programs are available within the subject property state. Langdale did mention that the agencies are aware of the issue of limited down payment and many first-time homebuyers not having enough cash to close in this environment and are in the process of creating this tool within their LPA underwriting engine to help with the top goal of affordability and the underserved.
Other topics discussed were:
- The replacement of the FICO credit score model with the FICIO 10T and Vantage Score models and transition from three credit reporting agencies to two. The concern: what if a loan is submitted with just one of the agencies and needs to switch to FHA or USDA and their credit requirements are different?
- Trigger leads that can cause confusion with borrowers and create competitive challenges for lenders by compression margins. Are they necessarily bad for borrowers if the goal is getting the best possible deal? More to come on this hot industry topic.
More About Down Payment Assistance
Speaking of down payment assistance and affordability, Down Payment Resource (DPR), a nationwide database for U.S homebuyer assistance programs, announced last year that a substantial share of mortgage loan applications are declined for reasons that can be addressed with homebuyer assistance programs. For example, loan applications declined for either insufficient cash to close or disqualifying DTIs often could have been addressed with down payment assistance programs. This creates a low-cost opportunity for lenders to increase purchase volume originations. As we noted last month, the top two wholesale lenders, UWM and Rocket, have introduced 1% down programs that include a 2% grant minimum, 620 credit score, and income equal to or less than 80% of the area median income (AMI). These programs are designed to not only help borrowers that have a need and qualify for down payment assistance to achieve the dream of homeownership, but also to increase broker originations in this higher-rate, low-inventory environment. Now other lenders are following suit: Guild Mortgage is the most recent lender that offers this 1% down with a 2% grant up to 5k. One difference on this Guild program is a 1% lender-paid buydown for the first year.
Mr. Cooper Acquiring Home Point Servicing
Mr. Cooper will pay $324 million cash for all shares of Home Point Capital. The deal gives Mr. Cooper an $84-billion servicing portfolio that should contribute a 10% increase in Mr. Cooper’s operating earnings in the first year. “This acquisition is consistent with our strategy of growing our customer base, deploying our capital with a focus on attractive risk adjusted returns and maintaining a very strong balance sheet” said Jay Bray, CEO of Mr. Cooper.
About This Blog:
What We’re Watching is a monthly blog of industry news curated by Brian Haber, who monitors the mortgage market for First American Data & Analytics.