August 4, 2020

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HUD Announces Housing Reform Recommendations

HUD Releases Housing Reform Recommendations

The Department of Housing and Urban Development has issued recommendations to the President for housing reform, including attention on down payment assistance programs and cash-out refinancing.

According to a press release issued on the HUD official site, this is NOT the same housing finance reform plan, which was developed by the U.S. Treasury Department.

There are major differences between the two in some respects including the HUD language discussing the need to focus on “the core mission” of the FHA where home loans are concerned.

It’s the view of the Treasury Department (as stated in the plan) that any changes to the core of what has traditionally been considered an FHA loan program could be detrimental.

The Treasury Department plan states, “…any proposal to fundamentally change the housing finance system should take careful account of the risks posed by the transition, particularly as housing-related activity represents a significant share of United States economic activity.”

“Stability in the housing finance system is crucial, and generally counsels in favor of preserving what works in the current system, including the longstanding support of the 30-year fixed-rate mortgage loan.”

Portions of the HUD plan takes a different focus, as evidenced by the following:

“FHA has grown concerned as an increasing number of borrowers have used the FHA program to extract equity from their homes. Some portion of FHA-insured mortgage loans are to borrowers who currently have or previously had an FHA-insured mortgage loan. FHA should assess repeat FHA borrowers to ensure these mortgage loans are consistent with FHA’s mission.”

In fiscal year 2018, the HUD plan states, cash-out refinance volume of over 150 thousand was considered, “the highest reported since 2009” That same fiscal year, cash-out refinance transactions represented more than 60 percent “of all FHA refinance transactions, a substantial increase from the FY2017 level of 38.94 percent”. And “particularly troubling” to HUD? The number of FHA cash-out refinances for conventional mortgages.

There are implications in the HUD plan, as well as a more overt discussion of what “reform” could mean to HUD. The HUD press release includes a recommendation that further attention be given to cash-out refinance transactions.

One passage of the HUD plan specifically states, “FHA should continue to monitor its cash-out refinance business closely to determine whether further action is necessary”.

Concern over FHA cash-out refi loans is not new; a 2019 step by the FHA and HUD reduced the FHA cash-out LTV to 80%, and further reforms may be in the works, as evidenced by the HUD press release. There was also mention of work needed for down payment assistance on FHA loans; we will cover that topic in another post.

At the time of this writing, neither the HUD reform plan nor the Treasury Department plan are anything more than recommendations; it will take time to see what actually gets implemented in the wake of the two new fiscal reform plans submitted for the FHA and HUD.

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