Make us your home page
Instagram
The Nation's Housing

Credit-score surprise backs FHA insurance change

DALLAS — Who has better credit scores on average: home buyers with higher or lower incomes?

Inside the country's fastest-growing home mortgage program, the surprising answer is: People with lower incomes have slightly higher FICO scores. That finding, which emerged from a statistical analysis of all approved mortgages insured by the Federal Housing Administration during fiscal 2007, is now buttressing a forthcoming major policy switch that could affect thousands of buyers and refinancers.

The FHA, which for decades has used a one-size-fits-all approach to pricing its insurance on home loans, plans to shift to a "risk-based" system keyed to FICO scores and down payments, beginning as early as mid July. Private sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down-payment amounts since the mid 1990s.

The FHA's move, which will cover all new applications including "jumbo" loans up to $729,750 in high-cost markets through December, will bring the agency in line with the private sector's predominant approach.

Brian D. Montgomery, the FHA's top official, outlined the impending change in a speech here May 8 to the annual conference of the National Association of Real Estate Editors.

Surprising numbers

Under the old approach, he noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That amounted to a pricing inequity for applicants who presented low risk of default on their loans, and an inappropriate subsidy of applicants who were likely to default.

A study of an entire year's applications turned up the additional fact that the FHA's lower-income borrowers typically had higher FICO scores than buyers with larger incomes.

"Is it counterintuitive? Yes," said Montgomery. According to the study, applicants with FICO scores of 680 to 850 had median incomes of $48,756 last year, while those with low scores of 500 to 559 had median incomes of $53,388. Fair Isaac Corp.'s FICO scores range from about 300 to 850 — the higher the better — and are predictive of future defaults and foreclosures.

Even at rock-bottom down payment levels of 3 percent, applicants with lower incomes had higher credit scores than applicants with bigger incomes making similar-sized down payments.

All of which underlines the key reason for making the switch to risk-based pricing: Why should people who have demonstrated superior credit — irrespective of their income levels — pay the same mortgage insurance premiums as loan applicants who have seriously flawed credit histories?

Under the new system, according to the FHA's outline of its plan, "a larger number of low-income borrowers (will) benefit from premium reductions than

. . . moderate-, middle- and upper-income borrowers combined." On 30-year loans with down payments of 10 percent or more, applicants with FICO scores above 680 will qualify for the lowest premiums — 1.25 percent of the loan amount up front and annual renewal premium payments of 0.5 percent. Borrowers with down payments under 5 percent and poor credit scores — FICOs ranging from 500 to 559 — will be charged premiums of 2.25 percent up front and 0.55 percent annually. All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5 percent premiums up front, and 0.5 percent annually.

Building business

To set premium rates by credit standing, the FHA plans to use the middle score of an applicant's three FICOs generated by the national credit bureaus, Equifax, Experian and TransUnion. If only two scores are available, it will use the lower. For applicants with thin or nontraditional credit histories on file at the bureaus, the FHA will underwrite and price the loans without reference to FICOs, with heavier emphasis on rent and utility payments among other measures of creditworthiness.

Though FHA mortgage volume has more than doubled in the past year, the move to risk-based pricing is expected to make it more attractive to buyers and refinancers. During the housing boom years, the FHA lost much of its business to subprime lenders and insurers who offered zero-down, low- or no-documentation loans at high interest rates and fees, including prepayment penalties. The FHA, by contrast, always has required at least a 3 percent down payment, full documentation of income and assets, but has never permitted prepayment penalties.

Since taking over as commissioner in 2005, Montgomery has emphasized modernizing the FHA and winning back market share. That has included pushing for higher loan limits to serve greater numbers of borrowers in high-cost areas such as California and along the East Coast. The FHA also is now the government's key vehicle for refinancing borrowers stuck with unaffordable — and often toxic — subprime mortgages.

E-mail Kenneth R. Harney at

kenharney@earthlink.net.

Credit-score surprise backs FHA insurance change 05/16/08 [Last modified: Friday, May 16, 2008 4:30am]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Special to the Times.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Pinellas licensing board asks Sen. Jack Latvala for $500,000 loan

    Local Government

    The troubled Pinellas County agency that regulates contractors wants Sen. Jack Latvala to help it get a $500,000 lifeline from the state to stay afloat.

    State Sen . Jack Latvala, R- Clearwater, is being asked to help the Pinellas County Construction Licensing Board get $500,000 from the state so it can stay open beyond February.  [SCOTT KEELER   |   Times]
  2. In advertising, marketing diversity needs a boost in Tampa Bay, nationally

    Business

    TAMPA — Trimeka Benjamin was focused on a career in broadcast journalism when she entered Bethune-Cookman University.

    From left, Swim Digital marketing owner Trimeka Benjamin discusses the broad lack of diversity in advertising and marketing with 22 Squared copywriter Luke Sokolewicz, University of Tampa advertising/PR professor Jennifer Whelihan, Rumbo creative director George Zwierko and Nancy Vaughn of the White Book Agency. The group recently met at The Bunker in Ybor City.
  3. Tampa Club president seeks assessment fee from members

    News

    TAMPA — The president of the Tampa Club said he asked members last month to pay an additional assessment fee to provide "additional revenue." However, Ron Licata said Friday that the downtown business group is not in a dire financial situation.

    Ron Licata, president of the Tampa Club in downtown Tampa. [Tampa Club]
  4. Under Republican health care bill, Florida must make up $7.5 billion

    Markets

    If a Senate bill called the Better Care Reconciliation Act of 2017 becomes law, Florida's government would need to make up about $7.5 billion to maintain its current health care system. The bill, which is one of the Republican Party's long-promised answers to the Affordable Care Act imposes a cap on funding per enrollee …

    Florida would need to cover $7.5 billion to keep its health care program under the Republican-proposed Better Care Reconciliation Act of 2017.  [Times file photo]
  5. Amid U.S. real estate buying binge by foreign investors, Florida remains first choice

    Real Estate

    Foreign investment in U.S. residential real estate recently skyrocketed to a new high with nearly half of all foreign sales happening in Florida, California and Texas.

    A National Association of Realtors annual survey found record volume and activity by foreign buyers of U.S. real estate. Florida had the highest foreign investment activity, followed by California and Texas. [National Association of Realtors]