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January 21st, 2010

Change Has Come to the FHA

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The Federal Housing Administration (FHA) has found themselves launched to the forefront of the housing industry. With a relatively-new commanding presence in the housing market, the FHA has simultaneously encountered struggles and success. To balance the two, the FHA announced “a set of policy changes” designed to both strengthen their shaky capital reserves, and to enable the administration to aid in housing’s recovery.

“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 [David] Stevens.

Here are the changes, directly from HUD.gov (emphasis added):

  • 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.
  • 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.
  • 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.
  • 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

    “The impact of these immediate changes is really pretty slight,” said HSH VP Keith Gumbinger. “If legislative authority is granted to increase the annual MIP, that will have the biggest impact on the FHA’s solvency moving forward.”

    To the FHA’s credit, we anticipated that their growing losses — due to their increased market share of troubled loans and weak borrowers — would cost taxpayers big time. Yesterday’s announced changes will begin to shore up the FHA without a loan from taxpayers (at least for the moment). Granted, the new FICO requirements and the added upfront costs will cause a marginal slice of borrowers to be eliminated from the FHA market, but the number should be minimal, and the FHA could be better for it.

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    4 Responses to “Change Has Come to the FHA”

    1. Mitch Says: January 21st, 2010 at 10:55 pm

      The only one I don’t like is the reduction in seller’s concessions. Why should the FHA be stepping into this one to begin with? If someone really wants to sell their house & they’re willing to do this, what’s the issue? The rest of it I can live with.

      Glad you wrote this one; I hemmed and hawed as to whether I wanted to write about it or not. :-)

    2. Tim Manni Says: January 22nd, 2010 at 10:27 am

      Hey Mitch,

      I couldn’t resist writing about this one…the reduction in the seller concession is, as I see it, to encourage FHA borrowers to come into the transaction with “more skin in the game.” They’re already coming into it w/ a low downpayment, and don’t forget, FHA borrowers can use the homebuyer tax credit as a downpayment.

      Good hearing from you,
      Tim

    3. s2kreno Says: April 5th, 2010 at 4:38 pm

      HUD data shows that excessive seller concessions distort the housing market, because if you are effectively paying someone to buy your house, would it be worth the appraised value in the absence of such concessions? HUD discovered that housing prices when builders offered such concessions were correspondingly higher than virtually identical neighborhoods without the closing cost help. The extra concessions add to the lender’s risk (or in the case of FHA, the taxpayer’s risk).

    4. Tim Manni Says: April 5th, 2010 at 5:50 pm

      You’re absolutely right Reno, thanks for commenting. These days it’s all about having the borrower put as much of their own money upfront as possible. One more way to gauge who the strongest borrowers are — as you said, it’s taxpayer money on the line.

      Good stuff as always,
      Tim

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    HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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    Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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