Analysts at JPMorgan Chase have pinpointed arguably the most notable impact of the FHA’s new credit rule – its affect on builders and first-time homebuyers.
As we reported just last week, a new regulation from the the FHA is now scrutinizing the creditworthiness of its candidates with much more intensity, and credit disputes with debts of more than $1,000 can now seriously harm the loan candidate’s chances at securing the loan, regardless of their credit score.
Previously, lenders were free to judge the severity of the credit dispute for borrowers, but now, they must defend their actions to the FHA with documentation before the agency will agree to guarantee the loan. Also, borrowers must either pay the loan in full, institute a series of payments (and prove such a plan exists) or provide documentation on why the dispute is faulty.
The rule went into effect on April 1, and the FHA quickly clarified that if the disputes were the result of a “life event,” such as a medical, divorce or lost employment, they would not be disqualified from the loan. That clarification, though, did little to please Chase’s analysts.
“FHA’s recent clarification on the rule represents only a modest softening, in our view,” the analysts said. “We believe borrowers having outstanding collections in one arena also likely have outstanding collections in other areas.”
The analysts estimated that 10 to 20 percent of the FHA’s loans could be impacted by the new regulation within the next two to three months, with first-time homebuyers bearing the brunt of the effects; in fact, the analysts expect 30 to 40 percent of first-time-homebuyer loans will be affected by the new rule.
And those impacts extend to the builders of new properties. Though some builders only rely on first-time buyers for a quarter of their sales, others, such as KB Homes, count 65 percent of their sales on the buyers. Overall, half of KB’s business is tied to the FHA.
“While some public builders have either not quantified the potential impact from the new FHA rules or have viewed it as immaterial — we believe due to these rules only being effective as of April 1 and it being fairly difficult to quantify this issue — at the same time, several private builders pointed to a material portion of their first- time homebuyer business as being negatively impacted,” the analsyts said.
And of course, the timing for the new rule could not be more peculiar – it comes at the start of the noted Spring homebuying season.
“It just seems very strange that they would do this in the midst of the selling season,” according to an analyst at another financial institution quoted by HousingWire.