FHA Guidelines Tightened

By admin • January 28th, 2010

FHA today announced some rather major guideline changes which will tighten up the availability of FHA loans. Your view regarding these changes is likely to be guided by your vantage point in the process.

Members of the general public who are not in the market for a home or a mortgage refinance will most likely approve. These changes certainly will improve the quality of the FHA loan pool moving forward. Provided, that is, the average FHA buyer can still meet the requirements.

That is where the real estate/mortgage industry may run into snags. One of the primary problems for all FHA buyers is coming up with the down payment plus closing costs to buy the home. The traditional FHA allowed seller contribution of 6% went a long way toward creating many good new FHA loans that paid on time and contributed to the FHA insurance pool. This has been lowered to 3% for all FHA borrowers. The net result is likely to be either higher interest rates for FHA borrowers, or less FHA loan availability because mortgage originators just won’t be incentivized to do the work necessary to get an FHA loan through the process.

For many years the FHA required down payment was a little less than 5%. I had expected FHA might revert to this former guideline. Instead, they have retained the 3.5% down payment for borrowers with credit scores above 580. Borrowers without credit scores, or with lower credit scores will have to put down 10% of the purchase price as a down payment.

I’m concerned that there is rapidly becoming no need for the FHA program, because if current trends continue there will be little difference between FHA loans and conventional loans.

Here is the full text of HUD’s announcement:

FHA Announces Policy Changes to Address Risk and Strengthen Finances

New Measures Will Help FHA Better Manage Risk, While Maintaining Support for the Housing Market and Access for Underserved Communities

WASHINGTON – Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation’s housing market recovery.

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens. “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”

Announced FHA Policy Changes:
  1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
    • The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
    • If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
    • This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
    • The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
  2. Update the combination of FICO scores and down payments for new borrowers.
    • New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
    • This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
    • This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
  3. Reduce allowable seller concessions from 6% to 3%
    • The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
    • This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
  4. Increase enforcement on FHA lenders
    • Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
      • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
    • Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
      • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
      • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
    • Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
      • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
    • HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
      • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
      • Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

In addition to the changes proposed today, the FHA is continuing to review its overall response to housing market conditions, and continuing to evaluate its mortgage insurance underwriting standards and its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives going forward.

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