FHA New Construction Revisions!
Mortgage Industry Insight: One of the great things about SCA is the range of issues we get to see, and the wealth of knowledge we get to tap into while working with dozens of clients on a monthly basis. Today, we'll share some important information about FHA new construction provisions.
By Gregg Oberg:
Do You Originate FHA Purchase Loans on New Construction? If so, get ready to see more applications. According to the Mortgage Bankers Association, FHA loans as a percentage of new construction purchase applications are on the rise. During the last 12 months (give or take), FHA purchase applications accounted for 15-18% of total application volume for new constructions. Between November 2018 and February 2019, the percentage ticked above 18%.
In a long awaited and oft debated step, FHA Commissioner Brian Montgomery addressed Mortgagee Letter 2019-04 and 2019-05—which together aim to “streamline and update [FHA] program guidelines and procedures”—took key steps to remove “unnecessary and outdated” obstacles to FHA origination.
While both changes may necessitate a review of your current Quality Control practices, focus should first be spent on determining how the changes may impact the demand, availability, and cost of origination for FHA loans.
Recap of FHA New Construction Rules
With respect to new construction, HUD has long required certain additional property verifications and borrower protections above and beyond what would be required for a typical home purchase loan. Although the costs of these protections is ultimately borne by the borrower, the administration of such protections by lenders is an frequently cited obstacle to providing FHA guaranteed loans to borrowers in new constructions.
The general thrust of HUD’s approach to new construction relies on the proposition that local building code authorities traditionally varied widely in quality, leading to HUD being unable to adequately capture the risk of loss associated with a new construction. As noted by Commissioner Montgomery in March 2019 comments, that concern is no longer present due to nationwide standardization of practices
March 2019 FHA Updates
Specific to the March 2019 updates, HUD has removed two requirements. First, required inspections on new constructions or existing constructions for which structural repairs performed necessitate an inspection have been “de-regulated” from a HUD standpoint. The previous FHA Inspector Roster, from which lenders were required to pick an investor, is no more.
Second, and in a related vein, HUD has removed the obligation of lenders to ensure borrowers obtain a “2 and 10”—2 years against systems defects, 10 years against structural defects—warranty on certain low deposit transactions. Essentially, this is an insurance policy against latent defects.
What’s It All Mean?
As with all regulatory changes; it means opportunity for the first of you to aggressively pursue these new opportunities. In the macro sense, we should see more applications due to the reduced cost of financing without a 10-year warranty. Burdens associated with origination on the institution side are also reduced; as we no longer need to obtain inspection from a limited FHA Inspector Roster.
Mortgagee Letter 2019-04 (Inspector Roster eliminated) took effect in August 2018 by passage of a Final Rule, and is offered as a re-communication of expectations.
Mortgagee Letter 2019-05 becomes effective for any case numbers assigned on or after March 14, 2019.
While the August 2018 change to the inspector list appears logical in light of the comprehensive building code requirements adopted by 49 jurisdictions pursuant to the International Residential Code, I have some reservations about the removal of “2 and 10” requirements. Under now-current rules, new construction borrowers will now only receive one year of protection (although HUD notes such borrowers are free to obtain private warranty if they so choose).
Consumer protection aside, I wonder whether the “barriers” cited in discussion of these changes are more burdensome on the demand side or the supply side. Pointedly: will reducing burden increase the demand for FHA products, or simply reduce origination burdens to a point where willing supply increases?
Spillane Consulting Associates has served the residential mortgage lending business since 1991. We have specialized in mortgage banking consulting services and provided quality control reviews, risk management and process consulting and employee training to credit unions, community banks and non-depository institutions. We are a thought leader on the strategic growth of residential mortgage lending. You can learn more by visiting our website, or scheduling a meeting with me or one of my colleagues.
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