This week Housing and Urban Development (HUD) Secretary, Shaun Donovan, presented to Congress his plans to tighten FHA's lending standards. In his testimony to the House Committee on Financial Services, Donovan made it clear, FHA is NOT "the next subprime" despite the fact that FHA has fallen below its minimum capital reserve requirement of 2% to .53% of its total insurance-in-force. He once again reiterated that FHA can withstand the current economic downturn, "under all but highly severe economic scenarios." (i.e., "we'll be OK, unless things get REAL bad.")
FHA's market share has increased from 3% in 2006 to currently 20% of purchases and 30% of refinances. Donovan admits FHA's infrastructure was not prepared for this increase, and therefore caused capital reserves to fall. Therefore, in order to improve the quality of FHA's portfolio, improve performance of future loans, and increase capital reserves to federally mandated levels, Donovan plans to make the following changes to lending requirements:
1. Reduce allowable seller concessions. Currently, sellers can contribute up to 6% of the sales price towards buyers' closing costs; FHA plans to reduce this amount to 3%. HUD's concern is higher seller concessions cause excessive risk by creating an incentive to inflate appraised values.
2. Create a minimum FICO score requirement. Currently, FHA financing does not have a minimum FICO score requirement; however, most (if not all) lenders impose their own minimum FICO score requirement for FHA loans they provide. The new minimum FICO score requirement has not been announced.
3. Increase borrowers' minimum investment requirement. HUD would like an increase to the current minimum investment of 3.5% so borrowers have more "skin in the game". The new minimum investment requirement has not been announced.
4. Increase of mortgage insurance premiums. Borrowers currently pay a 1.75% upfront premium, and a .55% annual premium (in most cases, may be lower for refinances, lower LTV's and shorter terms). HUD would like to increase these premiums to raise capital for its reserve account. Congress must pass legislation to increase the premium amounts.
5. Increase lender accountability. HUD wants its lenders to also have more "skin in the game" and has proposed new lender standards including (1) an increase to lender net worth requirement, and (2) an assumption of liability for FHA loans originated, underwritten and serviced.
I agree with some of these changes, but not all. The fact of the matter is FHA will tighten its lending requirements. So what does that mean to you?
If you're a home buyer, you need to start preparing for your home purchase further in advance. This means getting pre-qualified sooner, so you have proper direction on saving for your down payment and maintaining (or achieving) clean credit. Depending on your current situation, you may need plenty of time to do this, perhaps 6-12 months. I happen to know a GREAT lender who can help you with this...ehh hmmm ;).
If you're a Realtor, get your buyers pre-qualified fast to make sure they have enough time to prepare for buying a home. Also, there will be some confusion when these changes are made, so make sure you trust the lender you work with, and feel confident in their ability to close your loans. Once again, I know a GREAT lender who can help you ;)
Realtors for the most part understand this since changing lending standards have been par for the course for at least 2 years. One more piece of advice if you think these changes will affect the majority of your clientele -- it may be prudent to get a jump start on revamping your marketing to target a clientele that will not be as affected by these changes. I know that's something I will be considering.
Those are just my two cents. How about you? What do you think of the proposed changes, and as a home buyer or Realtor, what are you going to do differently to adapt?
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