FHA Reverses Prior Guidance And Will Continue Endorsing Single Family Mortgages
By Mel Fabrikant Tuesday, October 01, 2013, 04:26 PM EDT
We reiterate our view that builders generating a meaningful portion of sales from the entry-level and first-time buyer markets are most at risk in the shutdown. Among our coverage, we estimate LEN, MDC, BZH, KBH, and DHI generate 50% or more of sales and closings from entry-level borrowers and by consequence are most at risk of business interruption during the shutdown period.
• FHA Will Continue Endorsing Mortgages for Now. The FHA revised its shutdown plan with language indicating it will continue to endorse single family mortgages which was the opposite of the Agency's prior guidance we discussed in a note last night, Housing Thoughts Ahead of the Potential Federal Shutdown. The updated text of the HUD FY 2013 Contingency Plan states endorsement procedures will continue as normal assuming the shutdown is brief and assuming the agency does not exhaust its commitment authority. The agency does not detail the remaining authorization amount in the contingency plan, and we are waiting for a response from the FHA on this issue.
• FHA's Situation Has Changed, But We Still Believe Entry-Level Borrowers and Entry-Level Builders Have the Most Business Risk Currently. In the contingency plan, FHA discusses that processing delays for mortgage endorsements may occur due to staffing reductions, and the delays may increase depending on the length of the shutdown. Assuming the shutdown lasts days rather than weeks and any processing delays are rectified quickly after the shutdown concludes, we believe our order and closing forecasts for LEN, BZH, KBH, MDC,and DHI are valid since these companies have fiscal quarters ending in November for LEN and KBH and December for BZH, MDC and DHI.
• MTH and RYL Remain Our Top Picks. We believe MTH and RYL have business risk from the shutdown since some of their customers use FHA-endorsed financing. However, with MTH's buyer mix averaging 90% move-up buyers and with RYL's buyer mix averaging 70% move-up, we estimate these companies' customer mix is less sensitive to an FHA shutdown since FHA-endorsed mortgages are typically for first-time and/or entry-level buyers.