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30 THE RIGHT PATH FOR FHA? e latest American Enterprises Institute Housing Market Indicators released its data on October 2018 with a focus on the National Mortgage Risk Index. e report includes data on mortgage risk, house price appreciation, and home sales. "FHA's and the Consumer Financial Protection Bureau's pro-cyclical policies are continuing to drive home prices higher for entry-level buyers and are exposing buyers to an unsustainable home price boom," noted Edward Pinto, Codirector of the AEI's Center on Housing Markets and Finance. "As these policies since late-2012 have needlessly driven up low price tier homes by an additional $23,000, it is time both took counter-cyclical steps to protect homebuyers," he added. e report found that mortgage risk jumped in October with all indices setting new series' highs for the month. e composite Purchase National Mortgage Risk Index (NMRI) recorded an increase of 0.4 percentage points from Oct. 2017. e Federal Housing Administration (FHA) index set a new series' high at 28.2 percent. Refi NMRI also set a new series' high, primarily due to a higher Cash-Out Refi NMRI, it indicated. According to AEI data, the higher NMRI indicates that agencies continue to increase leverage to maintain levels of mortgage activity and in furtherance of their "affordable housing" mission. e report noted that FHA continues to loosen and Fannie's purchase risk index in Oct. 2018 at 1.4 percentage points outpaced that of Freddie's. e report also pointed out that over the last 3 years, a shift towards higher DTIs has primarily driven the NMRI higher. "Reports of the end of current housing boom are exaggerated," said Tobias Peter, Senior Research Analyst at AEI's Center on Housing Markets and Finance. "Inventories remain mostly tight, especially for entry- level homes, access to credit continues to be expanding, especially for first-time buyers, and mortgage rates have recently fallen below 4.5 percent again. All this points to a continuation of the boom at lower price points," he added. Shedding light on FHA lending, the report found that FHA's credit box is wide and therefore credit for entry-level buyers is not tight. FHA continues to add high-risk borrowers with their risk index climbing through risk layering. Compared to 2017, the agency purchase volume declined this October. A decline of 3.9 percent was recorded in purchase volume by count compared to 2017—a rise in volume from 37 percent in October 2013. e report attributes the decline to the increase in mortgage rate to over 4.5 percent earlier in the year. Per AEI Housing Market Indicators, maintaining purchase volume continues to be reliant on further agency credit easing—seen as needed to offset headwinds from gradually rising interest rates as a result of a slightly less accommodative monetary policy, and rapid home price increases. A WIN-WIN FOR BORROWERS AND SERVICERS In an article titled, "Enhancing the FHA's loss mitigation toolkit can improve borrower outcomes," experts from the Urban Institute pointed out that loan modification can be key to reinstating the loan and in avoiding foreclosure in case a mortgage borrower becomes delinquent. e loans insured by the Federal Housing Administration (FHA), however, prescribe loss mitigation guidelines that servicers of delinquent FHA loans must follow. ough these rules are helpful in minimizing FHA's losses, some of them end up being cumbersome as a process for borrowers and also increase the costs for servicers. e Urban Institute's Mortgage Servicing Collaborative suggests that simplifying some of these requirements will improve outcomes for both borrowers and servicers. Addressing the complexities involved in the documentation of household expenses and hardship, the article noted that the process of gathering information on monthly income and expenses is overwhelming for most borrowers. Such receipt requirements can delay or even prevent a borrower from receiving a modification for which they might otherwise qualify, the article stated. In addition to this, establishing borrower hardship is complicated, with multiple causes that may happen over an extended period—some of which are nearly impossible to document. e article notes that these documentation requirements act as barriers for struggling borrowers seeking mortgage assistance and have increased costs for servicers. Elimination of Borrower Expenses Documentation As borrower expenses play a minor role, the Mortgage Servicing Collaborative calls for the elimination of borrower expenses documentation for loss mitigation evaluation. e article states that it does not play a major role as servicers consider expenses only to determine whether to evaluate a borrower for a loan modification. Moreover, borrower expenses are not used to calculate the postmodification monthly payment, it indicated. Adoption of Internal Revenue Services In cases where expense analysis is required, HUD could adopt the IRS' Collection Financial Standards, the article pointed out. is will help provide monthly allowances for specific living expenses on food, personal care, apparel and other items that the IRS considers to be reasonable, and do not require any documentation from taxpayers. Following IRS standards would obviate the need for documents in most cases and provide much-needed clarity for borrowers and servicers, it noted. In order to collect evidence of borrower hardship and to help borrowers explain complicated situations, experts from the Urban Institute suggest that HUD use the government-sponsored enterprises' standard hardship affidavit (Form 710), which provides 10 options. e massive scale of the FHA program necessitates policies that maximize the number of borrowers assisted, said the Mortgage Servicing Collaborative.

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