Loan Modification

What About FHA Borrower Reserves?

By Peter G. Miller

The latest numbers from HUD tell us that in February delinquent levels for FHA mortgages — those at least 90 days behind — fell from 9.4 percent in January to 9.2 percent in February.

For FHA supporters this is evidence of progress on the delinquency front, however it should be pointed out that month-to-month changes are generally unimportant (remember — February had three fewer days than January this year and last February the delinquency rate was 7.3 percent).

Also, of course, by concentrating on delinquencies the essential point is missed, which is that the FHA has an excellent “cure” rate. According to the Mortgage Bankers Association the FHA program had a 3.57 percent foreclosure rate in the fourth quarter of 2009 — that’s BELOW the 4.58 foreclosure rate for all loans.

Down Payments

While the FHA has raised its up-front mortgage insurance premium and seems likely to raise the annual MIP as well, there’s no talk of increasing the down payment itself.

FHA Commissioner David H. Stevens has said that raising the down payment requirement could be counter-productive, but is there something else the FHA should raise?

There has been a lot of talk about the FHA’s reserve accounts and how much it has on hand to fend of claims against the program. As it happens, Forbes reports that the FHA has about $45 billion in reserves, a 6 percent cushion.

But — and I bring this up gingerly — what about borrower reserves?

Borrower Reserves

Buying a home involves more than a down payment and closing costs. There are inevitably expenses for moving, furniture, utility deposits, and a hundred other costs.

It seems odd that we expect the FHA to have reserves but not borrowers. This doesn’t make a lot of sense.

So, rather than increasing the required down payment from 3.5 percent to 5 percent, as many have advocated, why not a middle step? How about keeping the down payment where it is, but also saying that purchase-money borrowers — those getting an FHA mortgage to buy a home — must have a cash reserve in savings equal to not less than two full mortgage payments?

I know this thought will be shocking to some in the real estate industry who will instantly understand that more FHA guidelines equal fewer buyers and borrowers and thus reduced commissions and fees. But the greater goal is to reduce delinquency and foreclosure totals and there’s no reason why that should not mean more borrower responsibility.

Some borrowers will realize that once they have an FHA loan that the money set aside for reserves can then be used for other purposes. However, smart FHA borrowers will understand that savings are important and that it makes a lot of sense to stash away a few dollars so that foreclosure less of a threat if a job is lost or pay is reduced — things which have been known to happen of late.

Full post as published by FHA Mortgage Guide on April 05, 2010 (boomark / email).