FHA Changes Coming?

I don’t think that is would surprise anyone to know that FHA is in trouble.   Their reserves are way below what they are supposed to be, partially because their volume has skyrocketed and mainly because as they have become the lender of choice for the “sub prime” borrowers (those with credit scores under 740), their delinquencies have skyrocketed and so have the losses.

Kenneth Harney from the SanFrancisco Chronicle does a nice job of summarizing what the options are.   I’ve reprinted the highlights of it below.   

My feeling?   We’re going to see:

• A “token” increase in downpayments.   Most likely from 3.5% to 5%.
• Higher mortgage insurance premiums – that would end up being similar to a .25 to .5% hike in rates on FHA loans.
• Limiting seller concessions – reducing the amount that the seller can pay in terms of closing costs and prepaids would have a much bigger impact than an increase in downpayments.   I don’t know exact statistics, but my feeling is that it’s a large portion of FHA buyers have the seller pay 3 to 5% of the purchase price towards closing costs.
• Either an increase in a minimum credit score or more likely pricing “tiers” similar to what Fannie Mae and Freddie Mac do.   In other words, if you’re an FHA borrower with a 740 credit score, you’ll get a better rate than an FHA borrower with a 680 credit score.

No matter what way it’s going to come down, it’s going to be harder to qualify for an FHA mortgage in the future.    That’s a for sure thing.

Tom Vanderwell

FHA looking for ways to pump up its reserves

In the wake of an independent actuarial study that found the FHA’s insurance fund reserves far below the congressionally mandated minimum, the agency confirms it is actively exploring ways to pump up its reserves – including raising insurance premiums, minimum down payments and other unspecified moves.

Higher down payments. FHA’s current minimum cash down payment is 3.5 percent. On a $200,000 house, a buyer can bring just $7,000 to the table, aside from closing costs. A purchase of a $500,000 house in a high-cost area requires only $17,500 in cash……

Higher mortgage insurance premiums. Currently, FHA charges an “up-front” mortgage insurance premium of 1.75 percent of the loan amount. Most borrowers roll that into their loan and finance it. FHA also charges an annual premium, paid in monthly installments, of either 0.5 percent or 0.55 percent, depending on the down payment. To rebuild reserves, FHA could tweak one or both premiums to yield higher revenues. It could, for example, raise the up-front premium to 2 percent or as high as the current statutory maximum of 2.25 percent. It could also raise the annual fee, but the total premium could not exceed 3 percent under current congressional limits…….

Cutting home-seller “concessions” to borrowers’ loan costs. One of the big attractions of FHA financing has been the agency’s liberal allowance for seller contributions to borrowers to offset settlement and loan-related fees. The current FHA limit is 6 percent of the house price, which critics believe to be excessive. They say the policy effectively allows financially marginal borrowers to buy houses they shouldn’t, thereby raising FHA’s exposure to losses. Pinto calls the 6 percent allowance “insane on a loan with a 3.5 percent down payment.” He wants Congress to order FHA to reduce maximum concessions to 2 percent.

Toughening credit standards. In the mortgage market, FHA is by far the most lenient and flexible player when it comes to evaluating applicants’ creditworthiness. It does not have a minimum credit score, though it permits lenders to impose their own FICO score minimums. FHA also traditionally has been far more tolerant of credit history peccadilloes than Fannie Mae or Freddie Mac. When there are extenuating circumstances associated with credit problems – medical, marital or employment – FHA seeks to give applicants the benefit of the doubt.

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