Jeremy Radack, a real estate attorney who works with Texas builders to obtain mortgages for buyers, got a glimpse last week of what a proposed FHA rule change would mean to his business.
"We saw about a 30% to 35% decrease in sales," said Radack.
Starting April 1 FHA implemented a new rule that prevented mortgage applicants with $1,000 or more in disputed collections accounts from getting a federally backed loan unless they pay off the debt or can show a multi-month history of paying it down.
By late Friday, April 6, the agency had put off implementing the rule until July 1, to give mortgagees time to absorb the changes. In the meantime, "FHA intends to seek additional input on this section and work to clarify guidance, as appropriate," the company wrote to mortgagees. It said the mortgages written last week while the rule was in effect won’t have to comply.
By Thursday of last week FHA was already backpedaling on the rule change that it announced suddenly in late March. It revised it to exempt unresolved collections that borrowers could show were related to "life events" like medical bills, death, divorce, or job loss.
"Most collections issues are due to some life event," said Radack, adding that most people don’t take out loans they don’t expect to pay back.
Housing analysts have weighed in that the FHA rule changes would have a considerable impact on housing, and builder stocks took a hit last week because of its implications, Wells Fargo Housing analyst Adam Rudiger said in an investment note.
JPMorgan Chase analysts estimated the rule would cut demand for FHA loans by 10% to 20% in the next few months.
If and when fully implemented, the rule will have a particularly strong impact on young, first-time borrowers and the builders who sell to them, Radack says.
"Your D.R. Hortons, your K.B. Homes, they are all in big, big trouble" if the rule goes into effect, he said.
Radack says that some sort of collection issue is common on first-time buyer applications. "I know first-time home buyers and I know the starter home market, and that is just the way it is."
Sometimes borrowers got into trouble because they were making very little money and had something happen that caused them to rack up bills that they couldn’t pay back.
"My worst fear is that you have someone who has a 750 credit score who, five years ago, when they were in college, broke their leg, [didn’t have insurance,] and had a medical bill they didn’t pay because they couldn’t," Radack said.
He suspects that most borrowers wouldn’t go to the trouble to pay off the collections or to work out a collection plan because it is so difficult to work with creditors once the case has been turned over to collection agencies.
Radack says he understands that FHA is trying to make its loan portfolio stronger but that coming down hard on collections isn’t where they should be changing rules.
"Unless there’s some secret study that I have never seen, there is absolutely no relation as to how much collections you have and how you pay back your mortgage," he said. Credit scores are a bigger factor in predicting default, he said.
Another good way to strengthen FHA’s portfolio, he says, would be to lower the debt-to-income ratio it requires for borrowers, since if a borrower doesn’t have any extra money for emergencies, eventually the borrower will default because he has no choice.
"Emergencies happen," Radack said.
Teresa Burney is a senior editor for Builder magazine.