This was sent to us by Eric Egenhoefer, President of Waterstone Mortgage Corporation:
FHA tomorrow will announce a series of changes designed to protect the federal agency that has emerged as the cornerstone of the mortgage market as the housing sector wobbles toward recovery.
On the whole, mortgage lenders will find the new rules painful but necessary. The problem is that for the past 4 years, FHA was an "anything goes" environment. So they have a lot of catching up to do in terms of tightening up the rules.
What makes this hard: With FHA hovering around 40% of new loan originations, even small rule changes echo through the housing market with a big impact.
While the details are embargoed until tomorrow, our view of the new course charted by FHA is that:
- FHA is instituting prudent financial rules, without pulling back so far as to contribute to a further slowing of the housing market.
Mortgages will be harder to come by for some higher risk borrowers. But FHA has been careful to keep the door open for non-traditional borrowers -- especially minorities, 50% of whom now rely on FHA for mortgage credit.
Borrowers will bear more of the costs of the government insurance program through higher premium charges. But while the additional revenue will help ensure that FHA stays solvent, the burden to the individual borrower is modest and will not be a disincentive to purchase a home.
Some riskier borrowers will have to come up with higher downpayments -- a necessary move in those markets where a decline in home value can wipe out a new buyer's equity almost before the ink is dry on the sales contract.
So, FHA has a tough balancing act, but we think they have hit the "sweet spot" by successfully juggling three objectives simultaneously:
--Reduce the financial exposure of the FHA fund through tighter credit rules (especially with regard to bringing FHA capital reserves over 2%);
--Keep open the flow of mortgage credit sufficient to make sure the housing market doesn't go into a renewed dive,
--And avoid balancing the FHA books on the backs of credit worthy minority borrowers.
************ Highlights of the FHA Changes
-- Less than 580 need 10% down. Requires rulemaking.
--Raise upfront mip to 2.25 (up from 1.75) --Has significant capital impact. Implemented via mortgagee letter.
--Continue to allow finance of upfront MIP.
--Pursue legislative authority to allow flexibility to bring annual premium higher. (Currently capped at .55). Over time may increase annual and decrease up-front. FHA believes this is better for borrower. Upfront depletes equity.
--Reducing seller concessions from 6% to 3% across the board. Via proposed rule.
--Enforcement: a) credit watch terminations at lender underwriting id in addition to originator id. (i.e. company level) 300% compare would trigger termination. b) public reporting of lender performance through scorecard system. c) indemnification. Law allows indemnification against Lender Insurance lenders, HUD will implement through notice and comment. d) Expands indemnification beyond fraud and misrepresentation. (will go out for comment). e) Will seek legislative authority to enforce against DE lenders. f) Will seek legislative authority to establish ability to sanction lenders nationwide based on performance of local branch.
Tomorrow's New York Times and Wall Street Journal Stories:
NEW YORK TIMES January 20, 2010
F.H.A. to Raise Standards for Mortgage Insurance
The Federal Housing Administration, which is supporting the housing market by insuring thousands of new mortgages every day, is expected to announce on Wednesday that it is tightening standards.
Borrowers who get an F.H.A.-insured loan will soon have to pay a higher initial insurance premium. The new premium will be 2.25 percent of the value of the loan, up from 1.75 percent.
Starting this summer, sellers will not be able to offer as much help to buyers to pay their closing costs. The maximum amount of assistance will drop to 3 percent of the value of the property, from the current 6 percent.
Other changes will try to hold lenders who participate in the F.H.A. program more accountable by publicly reporting their performance rankings.
The new measures are aimed at shoring up the agency's finances while also screening out unprepared borrowers.
For years, the F.H.A. operated largely out of the public view. But it has become a subject of controversy recently even as it has ballooned in size. Some of the agency's critics want it to tamp down risk by insuring fewer loans; others think it should help the market by insuring even more.
As of December, the F.H.A. was insuring 5.8 million single-family residences that had a total loan balance of $750 billion. More than half a million of the loans were seriously delinquent and heading toward foreclosure.
Many of these troubled loans were made in 2007 and 2008 as the market was plunging. Last fall, the agency said its cash reserves had tumbled to 0.5 percent of its loans outstanding, far below the 2 percent mandated by Congress.
Left largely untouched by the changes is the most controversial aspect of the agency's program: a provision allowing buyers to make a down payment as low as 3.5 percent. Private lenders these days require at least 15 percent.
Borrowers who want to put the minimum down will now be required to have credit scores of at least 580, a relatively poor figure. Previously, there was no minimum score. But this rule might have little effect. The agency says that in practice, new borrowers already have much higher scores.
F.H.A. critics argue that the agency is allowing people to become homeowners while requiring relatively little of them, which they see as a replay of the poor lending standards that created the housing boom and subsequent decline.
Agency officials have responded by saying that they have adequate safeguards in place to make sure that borrowers are creditworthy, and that these loans are saving the housing market from collapse.
Lou Barnes, a loan officer with Premier Mortgage Group in Colorado who is among those who think the government is not doing enough to support the housing market, said the changes were not unduly restrictive. He noted that the insurance premium was merely returning to its level of a decade ago.
"The F.H.A. has done its best to protect the taxpayer, and the least harm to the credit supply," Mr. Barnes said.
An industry consultant, Howard Glaser, said that with "the F.H.A. hovering around 40 percent of new loan originations, even small rule changes echo."
Mr. Glaser, a former official with the Department of Housing and Urban Development, which includes the F.H.A., said that "obtaining credit will be a little more expensive or it may be a little more difficult to qualify" but that the changes were "not enough to have a systemic impact on slowing home buying."
- JANUARY 19, 2010, 7:38 P.M. ET
FHA to Boost Mortgage Insurance Premiums
The Federal Housing Administration will announce more stringent lending requirements on Wednesday to cushion against rising defaults and to stave off the need for a possible taxpayer bailout.
The FHA, which has taken on a major role in the housing market during the economic downturn, doesn't lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, which is currently set at 1.75% of the total loan amount, or $1,750 on a $100,000 loan.
The FHA is set to raise that fee to 2.25%, the second increase in the last two years, according to people familiar with the matter. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion. The value of those reserves, after projected losses, has fallen to $3.5 billion. Also to boost the reserve, the FHA also will ask Congress to increase a separate insurance fee that borrowers pay annually, people said.
FHA officials declined to comment.
The FHA, which backs up to half of all new loans in certain housing markets, has come under fire for insuring loans with little or no money down as home prices plunged over the past three years, and its reserves have fallen to razor thin levels. That is forcing the agency to walk a tightrope between protecting taxpayer dollars and helping to facilitate the housing recovery.
The FHA will keep minimum down payments at the current 3.5% level for most borrowers. But the agency will require riskier borrowers with credit scores below 580 to make a minimum 10% down payment. While the FHA doesn't have a credit score cutoff, most lenders require a minimum 620 credit score.
Some housing analysts have pushed for higher down payments on FHA-backed loans, and a bill in Congress would raise down payments to 5%, from the current 3.5%.
Instead, the FHA will reduce the amount of money that sellers can kick in for closing costs, to 3% of the sale price, down from the current level of 6%. The higher cap led to abuses where sellers "heavily marked up the purchase price," says Lou Barnes, a mortgage banker in Boulder, Colo.
The FHA is also set to announce a series of measures to boost its ability to oversee and take action against lenders that originate loans with FHA backing.
"Mortgage lenders will find the new rules painful but necessary," says Howard Glaser, an industry consultant. He says the rules were overdue given that "an 'anything goes' environment" had prevailed in recent years as former subprime brokers migrated into FHA-backed loans.