Written By: Bonnie Wilt-Hild
Call it portfolio retention or risk management, but as of Wednesday, I had several of my investors pull out of the market where non-credit qualifying (streamline’s without appraisal) FHA streamline refinance transactions were concerned. Several have said they would only purchase them if they were currently servicing the loan and I now have one other who has changed guidelines on credit qualifying streamline refinance transaction to require a minimum median credit score of 700 for loan amounts less than 417,000 and 720 for loan amounts greater than 417. All of this just as everyone rev’s up for the reduction in UFMIP to .01%.
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Making things more interesting still is that several of my investors have requested from us, a list of the brokers we currently have approved to do TPO and stated that that they will not add any new brokers going forward or that they simply would not allow loans that’s were originated by a third party. I am assuming this is designed to eliminate a rush of new broker shops opening in response to the reduced UFMIP. Interesting, our investors have just managed to significantly restrict the use of the FHA streamline refinance program while at the same controlling how many new loan brokers can enter the market in response to HUD’s new offering by changing a few simple rules. In effect, by refusing to purchase streamline refinance transactions without appraisals, the secondary market eliminated the product and if the larger banks no longer offer it to anyone other than existing clients, the product is simply no longer available. As far as the streamline refinance transactions with appraisal go, well it is now easier to complete a full documentation rate/term refinance as the investor overlays are not as stringent. The down side of course is the fact that the borrower will no longer reap the benefit of a reduced UFMIP while refinancing into a lower rate, but a standard rate/term refinance is still available for those who would benefit by refinancing and can’t quite cut a 700 credit score and from an underwriting standpoint I have to agree, it isn’t such a bad idea.
The recent past has taught a thing or two about mortgage credit risk and how the streamline refinance program was no exception to the rule. In the 1990’s streamlines were viewed as a program that carried limited risk and honestly the overall default rate supported these assumptions. The most recent recession however clearly demonstrated how risky the program actually is with many investor’s seeing a 50% default rate with the program in 2008 and 2009. As it turned out, many of the borrowers who streamlined during this time did so to buy themselves a little time because they were unable to make regularly scheduled payments due to layoffs or in some cases, just because they could no longer afford the mortgage they were in. In these cases, a simple streamline refinance bought them 1 to 2 months before a mortgage payment was due and many borrowers hoped this was enough time to find a job or accumulate enough funds to make the required payments. Again, history demonstrated that these assumptions on the borrower’s part didn’t work out very well and many lenders had to reconcile with the fact that they had approved the streamlines for borrowers who were not even employed at the time of loan closing, hence the revision in guidelines.
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In closing I will say from an underwriting standpoint, the streamline refinance program does not make sense from a risk management standpoint, particularly if as a lender you are completing the transaction having no idea of the value of your collateral or even your borrower’s ability to repay. The program itself was never anything I was comfortable with. I am not saying the principal behind the original program wasn’t sound, unfortunately however, when you are depending on the quality of underwriting of the original loan in the heyday of AUS and verify nothing of the borrowers current financial situation, you are simply asking for trouble. I guess it’s not a bad thing that the mortgage industry and secondary market eliminated the risk. Have a great week.
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
