WOW! There are changes, and then there are changes. FHA Commissioner David Stevens announced today a bunch of policy changes designed to strengthen FHA’s Capital Reserves. Those changes range from raising down payment requirements, to raising upfront and monthly mortgage insurance premiums to lowering the seller concessions. These are changes that can make huge differences in a person’s ability to actually get an FHA loan in the future.
FHA, like the banking sector, must also maintain capital ratios. Since they now insure about 30% of all new loans, FHA is nearing the limits of loans they can make based on their capital ratio. The loss of FHA as a lender in today’s market place would be hugely detrimental to the recovering housing industry. So, in an effort to fix this problem, FHA will be raising their upfront mortgage insurance premium fees from 1.75% to 2.25% and have requested approval for an increase in the monthly fee as well. They will also limit the high LTV financing to borrowers with a 580 credit score; a score under 580 will now require at least a 10% down payment. This will probably have the least effect on the market as the majority of lenders do not make FHA loans under a 620 credit score.
One change that I see having the biggest effect on the market will be limiting the seller contribution to 3 percent that will go into effect in early summer. Taken in conjunction with the new Good Faith Estimate changes that require credits for seller title insurance and yield spread premium for brokered loans, this could quickly become a major problem in an FHA transaction. Here is the announcement from FHA:
Announced FHA Policy Changes:
- Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
- The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
- If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
- This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
- The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
- Update the combination of FICO scores and down payments for new borrowers.
- New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
- This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
- This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
- Reduce allowable seller concessions from 6% to 3%
- The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
- This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
- Increase enforcement on FHA lenders
- Publicly report lender performance rankings to complement currently available Neighborhood Watch data - Will be available on the HUD website on February 1.
- This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
- Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
- Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
- This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
- Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
- Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
- HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
- Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
- Legislative authority permitting HUD maximum flexibility to establish separate "areas" for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches
As a mortgage banker, it will be easier to navigate some of the pitfalls that will come with the implementation of these policies. The announcement by FHA gave implementation time frames of these changes and a mortgagee letter will be issued tomorrow, so, now really is the right time to buy. Give me a call and lets see what we can do to qualify and put you into a home with an FHA loan. You can reach me at 541-342-7576/541-221-3455 cell or e-mail me. Alpine Mortgage Planning is located at 1200 Executive Pkwy. Ste. 100, Eugene OR 97401.