In my December 3, 2009 blog, "FHA Changes: Agency Considering Stricter Guidelines," I outlined some of the more significant changes FHA was considering on the horizon. Well, with the New Year upon us, so is that horizon. As January draws to a close, in an effort to avoid a bailout by taxpayers, the Federal Housing Administration (FHA) is poised to announce later this week more rigorous lending guidelines, in addition to increased borrower fees. The FHA changes are being prompted by the large number of defaults by mortgage borrowers. It is FHA's hope that the new lending requirements and increased fees will help create a cushion that would eliminate the prospect of a bailout by taxpayers.
Since the housing crisis began, FHA mortgages have surged in popularity due to their low down payment requirements, coupled with relatively low credit score requirements. It is no surprise, then, that FHA mortgage loans constitute approximately 30% of all mortgage originations nationally.
A common misconception among mortgage borrowers interested in an FHA mortgage loan is that FHA is a mortgage lender. Conversely, FHA simply insures FHA-approved mortgage lenders against default on mortgage loans they back. In exchange for an FHA-backed mortgage loan, borrowers pay an upfront mortgage insurance premium, which is presently set at 1.75% of the loan amount. For the convenience of the borrower, this insurance premium may be included in the loan amount. It is believed that FHA will announce on Wednesday an increase to that fee to 2.25%, which represents the second increase in as many years.
Currently, FHA's reserves (established to cover losses caused by default) are approximately $3.6 billion, or a reserve ratio of .5%. Federal law established by Congress requires FHA to maintain a reserve ratio of 2%. Had this increased upfront fee been established for last year, FHA would have a reserve in excess of $4.6 billion today.
Today, FHA mortgage borrowers are required to have a 3.5% down payment. Initially, it was believed that FHA would increase its down payment requirement to 5% for all borrowers, but have since backed off that idea a bit. It is now believed that FHA will continue to allow most borrowers to have a 3.5% down payment. However, FHA will increase the down payment requirement to 10% for borrowers with high risk credit profiles. More specifically, the increased down payment requirement would pertain to borrowers with credit scores below 580. Although, an increase in down payment to 5% across the board is not out of the realm of possibilities just yet. There is currently a bill in Congress that would raise the minimum FHA down payment to 5% for all borrowers.
Additionally, FHA will reduce the maximum seller's concessions to 3%, down from the current 6%. A seller's concession is the money a seller can pay in closing costs. The reason for the change in seller's concessions on FHA mortgage loans is due primarily to sellers marking up the purchase prices on homes in the first place, in anticipation of offering a seller's concession to make the sale of the home seem more attractive to potential borrowers.
In a nutshell, "Mortgage lenders will find the new rules painful but necessary," says Howard Glaser. Glaser specializes in analyzing the federal government's intervention into the mortgage, housing and financial services sectors.
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