FHA Plans to Tighten Standards — Finally!by Tim Manni
HUD Secretary Shaun Donovan testified today before the House Committee on Financial Services to explain the new measures that will implemented in order to better promote the Federal Housing Administration’s solvency (FHA) moving forward.
Earlier this year, we warned that the FHA could be the next taxpayer bailout, and we also noted that the FHA could quickly turn into the next subprime lender. Yet, today on Capitol Hill, Secretary Donovan said the FHA is neither. These new measures, according to Donovan, “will be focusing primarily on three areas: enforcement, improving the quality and sustainability of new loans insured by FHA, and increasing FHA capital.”
While we’ve been expecting tighter lending standards at the FHA for quite some time now (due predominantly to their vastly increased market share), Donovan’s testimony was unfortunately vague, and lacked specific details.
Here’s what he did say:
1. Lender Scorecards: The FHA will develop “Lender Scorecards” to “summarize the performance of lenders who do business with the FHA.” For months now, HUD has cracked down on unscrupulous FHA lenders in order to preserve the quality of underwriting on their books. We presume that this is merely another step in that direction.
2. Reduce Seller Concessions: The FHA is pushing to reduce the amount of seller concessions from six percent to three percent (a number more in line with industry standards). “The current level exposes the FHA to excess risk by creating incentives to inflate appraised value,” said Donovan.
3. Raise FICO Requirement: The FHA has already increased the credit score requirement for their streamline refi program, and now seem poised to increase the requirement for new loans as well. However, Donovan made no mention of what the actual score would be. At the end of September, Fannie increased their minimum credit score requirement to 620. Look for FHA do raise it to something similar.
4. More Skin in the Game: “We have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan – to make sure that FHA borrowers have more ’skin in the game’ and a stronger equity position in their loans,” said Donovan. He goes on to say that there are several ways to accomplish this and that the decision of how to accomplish this hasn’t yet been made. The only solution we can come up with is increasing down payment requirements, from today’s 3.5% to perhaps 4%.
5. Mortgage Insurance Premiums: Finally, the FHA is considering increasing their mortgage insurance premiums. “To protect against future uncertainty in market conditions, we are requesting authority from Congress to raise annual premiums, as this is one of the most effective means of raising capital for the fund with the least impact per borrower.”
Despite vague details, it’s an encouraging sign that the FHA recognizes the risks that are in front of them, and they’re striving to improve their situation without taxpayer dollars. However, these changes are likely to mean increased costs for borrowers. More details to come — stay tuned.