FHA has taken the task of helping to stabilize the housing market by offering affordable mortgages. This is with some risk as Esko Kiuru points out here in this article. The changes to lender requirements are necessary to keep FHA solvent.
As FHA's market share has soared over the past few years, thanks to the vacuum left by conventional mortgage lenders whose fortunes have suffered terrible setbacks in the ongoing real estate calamity. But it hasn't escaped the anger of the sinking housing market either. It has bravely insured mortgage loans with only the minimum 3.5% down all along and as prices have continued spiraling south these loans have gone underwater sometimes in a few months - particularly vulnerable were many Las Vegas mortgage borrowers, as well as those in Miami and many parts of California - and that often spells trouble. That's one of the reasons to its climbing foreclosure rate.
FHA has been talking for a while about streamlining its risk management policy and now it's ready to act on it. The new regulations will be published in the coming days. Here are the highlights.
- All new lender applicants must have a net worth of $1 million, up from the present $250,000. This will ensure all FHA mortgage providers are properly capitalized to better meet testy real estate market conditions.
- Present FHA lenders have one year to comply with this $1 million requirement once the new rule goes live. And a category called Small Business lenders must have a minimum net worth of $500,000 also within one year.
- Three years after ratification of this regulation approved lenders and new applicants doing FHA's single-family programs must possess a net worth of $1 million and 1% of total mortgage loan volume over $25 million.
- Mortgage brokers won't receive any longer individual FHA eligibility approvals. They are able to originate home loans via their affiliations with FHA-approved lenders, though. This adjustment actually mirrors the relationships brokers now have with Fannie Mae and Freddie Mac. Those already approved can continue to sign up business through the year, but after January 1, 2011, they need a sponsorship from an FHA-backed lender.
Arguably these changes will strengthen FHA, and quiet its critics. At least for the short term. Some of whom were already suggesting the agency would soon be ripe for a government bailout similar to Fannie Mae and Freddie Mac. A sound FHA is one of the main factors that the housing market sorely needs now to pull it out of the gutter. Without FHA's mortgage insurance function it wouldn't have much of a chance. The new rules predictably will limit some lender participation but it should minimally affect mortgage applicants' access to its products.
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