FHA Changes Effective Jan 1, 2010

Maybe you heard a few things about FHA changes on Friday?  There are a lot of documents- official and unofficial circulating, but we wanted to give you the condensed version of what we see as most noteworthy.

FHA Lender Certification.  The FHA "funding source" must maintain FHA certification, not the broker - who must only fund through a certified FHA lender.  This is good news for brokers, lenders, and consumers as it will ensure plenty of access and competition for FHA loans.

Requires Lender To Have An Audited Minimum Net Worth.  The "funding source" (not the broker) must have a minimum and audited net worth of $1 million.  The funding source must submit audited annual financial statements to FHA to prove they meet this criteria.  This is up from the previous minimum of $250,000.  There is speculation that further increases over and above this new $1 million minimum will be sought in the near future. 

Lender Performance "Skin In The Game".  Clearly the agency is seeking to ensure that lenders have funds available to compensate the FHA if their loans fail to meet qualify standards.  Additionally, lenders are going to be required to have more "skin in the game' relative to the performance of FHA loans they make.  This will assuredly tighten supply as lenders will bias toward conservative underwriting when they have more on the hook for future loan performance.

Modify Procedures for Streamline Refinance Transactions.  While a lot of particulars here, basically a streamline transaction must now be a fully document loan.  Some of the adds are new requirements for seasoning, payment history, income verification, demonstration of a net tangible benefit to the borrower, cap the max LTV to 125%, and require an appraisal when a borrower wants to add closing costs to the transaction.  This will also tighten supply of FHA credit somewhat, but the biggest impact will be slowing down the process and adding more weight to FHA pipelines for lenders.

Appraisal Process.  Historically FHA prohibited mortgagees from accepting appraisal reports completed by an appraiser selected, retained or compensated, in any manner by real estate agents. To ensure appraiser independence, FHA-approved lenders are now prohibited from accepting appraisals prepared by FHA Roster appraisers who are selected, retained or compensated in any manner by a mortgage broker or any member of a lender's staff who is compensated on a commission basis tied to the successful completion of a loan.  In other words, the funding source will order the appraisal and will likely be using HVCC type guidelines as convenience.  This will undoubtedly add more time and cost into the appraisal piece which will ultimately be paid for by the consumer.  Also, appraisals will only be valid for no more than 4 months.

What Happened?  All of this came as FHA confirmed that they will announce, on September 28, that the agency will fall short of their legal requirement to maintain minimum reserves of 2% of the loans it insures.  Experts - including us- have been forecasting this for months.  This "cushion" was 3% in 2008, down from 6.7% in 2007.

FHA has been a stabilizer in the market by providing much needed liquidity for lenders and homebuyers/owners.  In the first half of this year, FHA accounted for about 19% of new home mortgages, compared to just 2% in 2006.  First-time homebuyers have been involved in nearly 40% of new home purchases this year and about half of them utilized FHA funding.

Joshua Campbell

Vice President

National Home Loan Advocates

Cell 972.904.3694

josh.campbell@nationalhomeloanadvocates.com

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