FHA Cash Crisis: How this May Affect Borrowers
December 17th, 2009
Related FHA Stories
- House Financial Services Committee Approves Plan for FHA
- FHA: The Balancing Act Between Risk and Accessible Home Loans
- Mortgage lenders adding stricter requirements to FHA guidelines
- FHA guidelines: Meeting lender and borrower needs
- Increase Shot Down: FHA Down Payment Remains 3.5%
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As FHA reserves for paying claims against home loan defaults dwindle to near zero, policymakers are considering changes to FHA’s mortgage insurance program. Proposed changes could affect millions of homebuyers and homeowners depending on FHA loans and refinance transactions.
As FHA’s mandated reserves drop to nearly nothing, and national unemployment figures remain at 10%, lawmakers must find ways to stop the bleeding due to high rates of FHA loan foreclosures. Although homeowners pay mortgage insurance premiums to FHA, when they stop making mortgage payments and their home loans are foreclosed, FHA must reimburse mortgage lenders for foreclosure losses.
In today’s challenging economy, it’s easy to see how FHA reserves have all but disappeared. What is not easy is finding a way to re-establish FHA reserves without charging more to home buyers and homeowners who depend on FHA loans for financing home purchases and refinancing to lower rates and better mortgage terms.
FHA Loans: Fixing What’s Broken
In her recent article for the Baltiimore Sun, financial advisor and writer Ilyce Glink reports that high level officials of FHA are mulling over multiple options for solving FHA’s cash flow problems. Glink’s source, an un-named senior ranking official at FHA, says that the following options are “on the table.”
- Raising minimum credit scores required for FHA loan approval: FHA has traditionally backed home loans for low to moderate income families that have minimal traditional credit or compromised credit. By raising credit scores, and placing more emphasis on their importance, some buyers may no longer qualify for FHA loans. Preliminary discussions indicate that FHA could raise minimum credit scores to 620 or more.
- Raising minimum down payment: By raising the minimum cash down payment required of borrowers, the FHA may reduce its mortgage delinquency rates. The idea that homeowners with more money invested will be less likely to default may not make much sense while long-term unemployment remains a primary cause of mortgage foreclosure.
- Reducing seller contributions to buyers: FHA guidelines currently allow sellers to contribute up to 6% of allowable closing costs on behalf of buyers. FHA may reduce this amount to 3%. This is another method of increasing buyers’ up-front investment in their homes.
- Changing mortgage insurance requirements: FHA loan requirements presently call for borrowers to pay an up-front mortgage insurance premium and also annual mortgage insurance premiums, which are added to monthly payments. No details of changes to mortgage insurance payments are available, but increasing mortgage insurance amounts coupled with higher down payment requirements may price some buyers out of FHA loans.
In addition to these potential guidelines affecting FHA borrowers, the agency is also focusing on lender accountability and is planning to seek reimbursement for foreclosures resulting from making fha loans that don’t conform to agency guidelines. No matter what solutions FHA implements, the spectre of long term unemployment and economic unrest continues to haunt FHA, mortgage lenders, and homeowners.
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