FHA Makes Extensive Policy Changes to Address Default Risk
By: Carrie Bay
The Federal Housing Administration (FHA) said Wednesday that it is raising homebuyers’ up-front costs for mortgage insurance, tripling downpayment requirements for borrowers with low credit scores, and cutting seller concessions in half.
The agency says the new policies for its government-insured mortgages will help FHA better manage loan risk and losses. According to FHA’s latest monthly activity report, nearly 9 percent of the single-family mortgages it insures against default are at least 90 days past due. The record-high delinquency rate has sent the number of claims FHA has been forced to pay out skyrocketing and left its capital reserve fund depleted – falling below what’s required by law for the first time since the agency was formed.
The FHA currently backs about 30 percent of all new loans for home purchases and 20 percent of refinanced loans. The agency’s share of the mortgage financing market has increased nearly 1,000 percent (yes, that’s 1,000) since 2006, as private lenders pulled back and the credit crunch set in – it’s a position that FHA Commissioner David Stevens says can’t be carried on for the long-term. He insists it’s essential that the federal mortgage insurer’s portfolio eventually return to pre-crisis levels and back to its original credo of providing financing for homebuyers in underserved parts of the country.
But for now, Stevens said, “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.”
Stevens called the new policy changes “the most significant steps to address risk in the agency’s history.”
As part of the plan, FHA is increasing up-front mortgage insurance premiums paid by borrowers from 1.75 percent to 2.25 percent. The change will go into effect “in the spring,” the agency said.
Stevens has also requested legislative approval to raise the maximum annual premiums that FHA can charge. If this authority is granted by Congress, then the second step will be to shift some of the premium increase from up-front to the annual fees assessed. FHA says this shift will allow it to increase capital reserves with less impact to the consumer, because the annual premium is paid over the life of the loan instead of at the time of closing.
New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5 percent downpayment program. Homebuyers with less than a 580 FICO score will be required to put down at least 10 percent. This change is expected to take effect early this summer.
Changes are being made on the seller side of the equation, as well. Beginning this summer, the amount that sellers can kick in – typically in the form of closing costs – will drop from 6 percent to 3 percent of the home’s value. FHA says the current level exposes the agency to excess risk by creating incentives to inflate appraised value, and the reduction will bring its criteria in line with industry standards on seller concessions.
In addition to the policy changes introduced, the mortgage insurer plans to beef up oversight of FHA lenders. Beginning February 1, lender performance rankings will be available to the public on HUD’s Web site.
FHA is also planning to implement statutory authority to enforce indemnification provisions for lenders that delegate their insuring processes, and is pursuing legislative authority to increase enforcement on FHA lenders. The authority would include requiring all approved mortgagees to assume liability for all the loans they originate and underwrite, as well as the ability to withdraw FHA approval for a lender nationwide if the performance of one of its regional branches is faulted.
Robert E. Story, Jr., chairman of the Mortgage Bankers Association (MBA), commented “MBA supports FHA’s efforts to root out those lenders who pose undue risk to the program. We will work with FHA to ensure those efforts include fair and thorough investigations and appropriate due process for lenders who could be impacted.”
The agency expects these steps to tighten up its standards will help mitigate rising defaults and pay-out claims, and give a much needed lift to its capital reserves in order to avert what so many economists are proposing – that the federal agency itself will need a taxpayer bailout.
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