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How Can The FHA Raise More Cash?

by Peter G. Miller
December 9th, 2009

With all the mooing and carping about FHA reserves, most of it wrong, there still remains the issue that the FHA mortgage program, like all loan insurance efforts, needs to be reinforced.

HUD Secretary Shaun Donovan offered an interesting insight in how the FHA mortgage program can be made more secure and less risky in testimony last week before Congress.

To start, Donovan noted that HUD has dumped 270 FHA lenders. This is a little-discussed matter, but you have to wonder what losses have been sustained as a result of lenders who did not meet program standards for one reason or another. You can bet with absolute certainty that HUD is going to make lenders get loan applications right — and pay the price when they don’t.

On the matter of reserves, Donovan repeated what we have been saying here for some time, to wit: “we recently reported to Congress that FHA’s secondary reserves have fallen below the required two percent level – to 0.53 percent of the total insurance-in-force. However, when combined with reserves held in the Financing Account, FHA holds more than 4.5 percent of total insurance-in-force in reserves today -– $31 billion set aside specifically to cover losses over the next 30 years.”

The money in the Financing Account represents the annual FHA profit which has been turned over to the Treasury Department. It is literally money belonging to the FHA –think of it as cash you put in a bank rather than your pocket. It’s still your money.

Donovan also made another point we have been making: “Subprime delinquencies are 240 percent higher than FHA’s for a reason. While others participated in investor-owned markets or were exposed to exotic mortgages such as option-ARMs and interest-only loans, and while some tolerated lax underwriting standards, FHA stuck to the basics during the housing boom: 30-year, fixed rate traditional loan products with standard underwriting requirements. Unlike subprime lenders, FHA requires that borrowers demonstrate they can pay their mortgage by verifying their income and employment.”

Less Risk

Okay, so what can HUD do to reduce loan risk? Here are some ideas from Mr. Donovan.

___ Reduce the size of so-called seller-contributions from 6 percent of the loan amount to 3 percent. In some cases buyers were willing to pay higher prices if they could get bigger seller concessions — meaning that the FHA was insuring an oversized loan.

___ Right now HUD does not generally require credit scores at this time — but HUD may want to change this policy and establish a general credit minimum. A HUD official tells me that FHA’s only credit score requirement is that if a borrower’s credit score is less than 500, then the borrower must put 10% down –- instead of the basic 3.5% requirement.

___ The current FHA mortgage up-front premium is 1.75% right — but HUD actually has authority to charge up to 3% up-front. Don’t be surprised if the up-front fee is soon raised.

When will these changes start? Watch this space in January.

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