Foreseeably Harder Approvals: FHA gets tough

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For many years home mortgage insured by the Federal Housing Administration (FHA) have made home ownership possible for millions of home owners. During the "boom" FHA loans lost a lot of ground in the marketplace because non-conforming loans were often easier to get and cost the borrower less scrutiny and often less out of pocket. (More on from my article this morning.)

Welcome the day when Housing and Urban Development Secretary (HUD) Shaun Donovan stood in front of Congress and reported the reserves of the FHA insurance pool to be only .53% - far below the federally mandated, by law, 2% reserves. As you may imagine Mr. Donovan, in an effort to save his job, is now scrambling for good ideas to get those reserves back to the minimum legal level. Let us all observe as the fireman tries to put out a big fire while his own pants are on fire.

Here are some of the recommendations thus far:

  1. Raise the required minimum down payment from 3.5% to 5%
  2. Lower the maximum seller contribution from 6% to 3%
  3. Establish a required minimum credit score
  4. Eliminate the ability to finance the Up Front Mortgage Insurance Premium (UFMIP) into the loan
  5. Raise the cost of FHA mortgage insurance (higher premiums)
Currently it is much more difficult to be approved for a home loan, purchase or refinance, than it was two years ago or even six months ago. Mortgage brokers are not dropping like flies they have already dropped like flies and the remaining small percentage are having great difficulty getting loans underwritten and closed when they involve lower credit, lower income borrowers. Mid-level lenders are now the ones who are disappearing as they still lose warehouse lines of credit at an astonishing rate. This week saw the demise of LendAmerica.

Judging from the applications I have accepted and closed over the last few months these changes will absolutely impact at least 25% of the borrowers who have successfully purchased or refinanced their homes in the last few months. In fact I have two borrowers today who easily qualify who will likely not qualify if these changes are made. Considering I'm one out of tens of thousands go ahead and do the math. 

Just wait ... it's not only FHA - it's Fannie, then Freddie and Ginnie. We predicted it a few months ago that it would not be long until buyers would need a minimum of 5% down, a minimum of a 640 credit score and rates would start to rise.

Are you ready to pay attention even if you don't get CEs for participating in the conference calls? If I were an agent I would be - I would want to be ahead of the curve!

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Comments (51)

Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

I'm mixed on a lot of this.  I think loose requirements and a lot of stupidity are how we got here.  However, there are many people, especially first time buyers in an expensive place like Orange County, who won't be able to buy with higher down payments.  People may argue that maybe they shouldn't but when you look at $400,000 homes (which is fairly low around here), that's a lot of money to have put aside especially when you include closing costs. 

Would the extra money be better saved for a rainy day so a mortgage payment could be made from it if needed?

Dec 03, 2009 03:46 PM
Esko Kiuru
Bethesda, MD


As FHA, Fannie Mae and Freddie Mac keep absorbing losses, it's kind of a done deal that they'll have to tighten guidelines. And that will just prolong the real estate market's recovery as fewer consumers will qualify for mortgages.

Dec 03, 2009 04:21 PM
Dana Devine
Charles Rutenberg Realty - Apollo Beach, FL

having been a loan officer for 30 yr(Realtor now) and my wife 25 yrs...we were doing FHA when  it was  not  popular and agents got mad at us for going FHA, we used FHA to help the borrower, instead of going subprime, SISA, NINA... these type of loans werw not good for the buyer/borrower and the loan officer doing those loans made more money...

NOW those worthless subprime guys have moved into the FHA market and are bringing it down....they dont care ...they just search and distroy and move on

And kids....FHA does not credit score.....years ago(years)  the underwriter mada a decision based on the merit of the file..not that the minimun middle credit score has to be 640 and you have a 639...thus you do not get a loan

FHA needs to stay at 3% down....first time home owners need this BUT....BUT   make requirements for the loan broker harder to have a FHA license/certification...if we just made it a requirement that no one gets a FHA license if you have a felony conviction, this  would get rid of half the loan officers/brokers

Dec 03, 2009 10:39 PM
Home Loan Search.Online
Home Loan Search Online - Newnan, GA

You are absolutely right! This will make it a lot more difficult for home buyers and it will hurt housing recovery. I guess they are just trying to save their own skin. Nice pic by the way.

Dec 04, 2009 12:08 AM
Jessica Horton Jessica Horton Realty
Jessica Horton - Jessica Horton & Associates - Griffin, GA
Jessica Horton: I'm not #1... You Are!


I've yet to see ANYTHING from this administration that is good for the economy. I'm against the $8k tax credit and believe that we can't continue to offer these low interest rates. It just isn't healthy IMO...

Certainly credit score isn't a guarantee that people will stay in their homes, but the more "skin in the game" a person has the less likely they are to walk away without fighting for it. When their financial involvement is equivalent to first and last months's a bit easier to say, "Forget it!" I can't tell you the number of people I've spoken to about selling who don't have a mental attitude of "ownership". And that IS a problem!

This is an overreaction and a day late and a dollar short, but continuing down the same path isn't sustainable either. I understand your point. I really do. But what concerns me is the vast number of REALTOR(S) (and mortgage brokers) who believe they are entitled to sell homes as quickly and easily as giving away free money. We aren't guaranteed the right to have smooth sailing any more than people have a right to own a home without working hard and saving up for it.

You are from Georgia and know that FHA is a huge part of my business, but I'm all for people saving more money and being in a better position to purchase. If that means that my lifestyle isn't what it used to be: So be it -- it isn't about me and my needs. The sooner our profession gives that more than lip services the better we all will be.

Dec 04, 2009 12:52 AM
Bob Prevelige
Zenith Mortgage Advisors - Hopkinton, MA

Here we go...let's start with the obvious...I'm a broker and have been for a dozen years.  I've seen some changes in that time.  From tight underwriting to loose, and back to tight again.

Is it SO horrible to have to actually SAVE (gasp) money before you buy a home?  If you have skin in the game, you fight harder to keep your house when times get tough.  People I see don't want to be under-employed, so they don't work at all.  They bemoan the economy, and complain.  How about this....figure it out!  Work any job until you find a better one.

Owning a home is a privilege and a responsibilty, not a given right of adulthood.  Ask the older generations around...there was no PMI at all, and you needed to save (that dreaded word again) 20% to buy a home.

I do tons of FHA loans, and I would be impacted by the changes you've listed, but I haven't seen any even quasi-official suggestions about those guidelines, so I personally am far less than concerned at this point.

Dec 04, 2009 01:24 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Ken, we need to have a thought process that is long term. If FHA continues to bleed they could bleed to death. Would we rather have FHA with tighter guidelines or no FHA at all?

Tighter guidelines are a natural response to underwriting that assumes every applicant could be the next foreclosure and every property will continue to depreciate.

Until our economy gets a grip on this, FHA and the mortgage world in general will continue to tighten guidelines. We cannot emerge without pain. It is that simple.

I don't like it either, but the best thing we can all do is urge our FHA clients to act as quickly as they can. Because things are going to get worse before they get better.


Dec 04, 2009 01:43 AM
Jeffrey Friel
Keller Williams Greater Omaha - Papillion, NE - 517-1614

Certianly not good news, there seems to be a lack of consistency in poilicies at the Federal level.

Dec 04, 2009 02:09 AM
Tim Maitski
Atlanta Communities Real Estate Brokerage - Atlanta, GA
Truth, Excellence and a Good Deal

Ken, Thanks for responding to my comment.  But I think you might have read more into it than was there. I made a rhetorical question and I didn't mean to infer that you have never put forth any good ideas.  I think Janet Guibault on commnet #38 might have said it better than I.

"If FHA continues to bleed they could bleed to death. Would we rather have FHA with tighter guidelines or no FHA at all?"

I know that if I were lending my own money, I would never lend at such terms as FHA has been.

Dec 04, 2009 02:21 AM
Karen Cooper
Karen Cooper | Sr Mortgage Loan Originator ! NMLS # 223305 | First Federal Bank of Florida, Ocala, FL - The Villages, FL
Helping Homeowners w/Home Loans in 27 US States

Ken - I'm seeing the same affect on my pipeline, only I believe based on my targeted market of first time home buyers in the low-to-moderate income ranges, I believe these proposed changes, both those you reference and those that are still in comment stages at the Federal Reserve, will negatively impact closer to 50-75% of my pipeline. Janet weighs in on the other side of the coin with some great input, too. Is there an easy solution? No way. Are these proposals the best solution? I don't thing so.

Dec 04, 2009 02:35 AM
Wayne L. Brown
Franklin Advantage Inc. - Alpine, CA


It's things like this that require all of us, and our organizations such as the NAR, NAMB, etc to turn up the heat on our elected officials.

Ironically, most in government have never had a real job, and don't have a clue what it's like in the trenches.

Good post.

Dec 04, 2009 04:31 AM
Matt Stigliano
Kimberly Howell Properties (210) 646-HOME - San Antonio, TX

Ken - I never did leave a comment here after I re-blogged it, my apologies.  I usually try to remember to do that.  I just finished up quite a post over on my main site about all of this and also posted a bit of an intro on it here at ActiveRain.  My post got featured, so I owe you a bit of thanks for that as you were the inspiration behind it.

Keep bringing us great news on FHA Ken, I love it.

Dec 04, 2009 08:49 AM
Lori Cain
Own Tulsa - Tulsa, OK
Midtown Tulsa Real Estate Top Producer

I read about this the other day. When will these changes be voted on? 90% of my Buyers are FHA, barely scraping up the 3.5% down and asking the Seller to pay closing costs. This will KILL Buyers in my market.

Dec 06, 2009 12:44 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

I think this is like the other side of the coin. After all this hype with Short sale, loan modifications, all this pressure for Lenders to lose money, do we really expect that there will not be a tougher lending ahead? 

It is also mostly affecting the very same people, that it was supposed to help.

Dec 06, 2009 06:56 AM
Carol Culkin
Diamond Partners Inc - Overland Park, KS
Overland Park Residential Real Estate

Yes this is frustarting.  One hand doens't know what the other is doing. What is the purpose of the tax credits being offered to encourage buyers to buy if getting a mortgage is going to be even so much harder now?  Do we want the market to improve or do we want it to remain what it is?  

Dec 07, 2009 07:30 AM
Rosemary Brooks
BMC Real Estate - 209-910-3706 - Stockton, CA
The Mother & Daughter Realty Team

Very frustrating.  FHA, HUD and other government agencies are always so far behind the 8-ball... and it is scrarry that they are coming up with all these "new" rules, procedures and program.  Keep your fingers crossed and keep moving ahead is all we can do.  I love the devil look.

I am just out in the rain trying to make contact with my associates.  Have a blessed day!

Dec 10, 2009 04:36 AM
Jim Gilbert
Sky Realty - Austin, TX

We've seen a whirlwind of new rules in the past 11 months! These probably make sense economically for the country, but will devastate some who really want to buy a home. BTW, is there any doubt that our government is without a clue on many fronts?

Jim Gilbert, Sky Realty/Heart of Austin Homes

Dec 10, 2009 09:15 AM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Rosemary - no doubt they are behind the 8-ball.

Jim - no doubt they are without a clue.

Dec 11, 2009 04:27 AM
Mark Towler
Southeast Mortgage - Atlanta, GA

I believe the reduction in seller contributions will be a bigger hit than the rise to 2.25% MIP. The low down payment buyer does not have the money to cover their prepaids. They can roll the MIP into the loan with just a small rise in monthly payment.


Jan 24, 2010 10:18 PM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Mark you are correct - we need to let everyone know that is up for public comment and not yet "set in stone".

Jan 25, 2010 09:05 AM