Stricter FHA Loan Guidelines Expected to Reduce Agency Losses

by Karen Lawson
December 16th, 2009
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FHA, the primary provider of US home loans to moderate income borrowers, is expected to tighten lending requirements and net worth requirements for its approved lenders. These moves could increase the cost of FHA purchase and refinance loans.

After news of its reserves falling below mandatory levels, FHA is moving to reduce risk associated with insuring mortgages. Shaun Donovan, HUD Secretary, notes that FHA currently insures about 30% of home purchase mortgages and 20% of refinance mortgages in the US. HUD, which oversees the FHA, is considering measures for reducing risk associated with its mortgage programs. Proposals include:

  • Increasing up-front cash requirements: FHA currently allows as little as 3.5% borrower down payment. About 31% of FHA borrowers made the minimum down payment during the first 8 months of 2009, with another 55% contributing 3.5% to 5% down payments. These figures support the significant role of FHA in providing mortgage and refinance loans to moderate-income borrowers.
  • Increasing mortgage insurance premiums: FHA requires borrowers to pay an up-front mortgage insurance premium of 1.75% of the loan amount at closing and to continue paying annual premiums that are pro-rated on a monthly basis and added to monthly mortgage payments. Raising annual premiums may be more affordable for homeowners, but FHA mortgage insurance is already problematic for cash-challenged borrowers.
  • Raising minimum required FICO credit scores: FHA currently allows borrowers with little credit to qualify for FHA insured loans, but deep losses caused by legions of FHA foreclosures is causing FHA to review its credit criteria. Although no minimum credit score has been announced, HUD is expected to require higher credit scores.

Deficits in FHA cash reserves are thought to be caused by losses connected to irresponsible borrowing and falling home values. FHA is reviewing its lender approval policies in efforts to reduce loan fraud and substandard lending practices leading to foreclosure.

FHA-approved Mortgage Lenders Held to Account

FHA relies on its approved mortgage lenders for underwriting and approving FHA mortgages. Proposed program changes affecting mortgage lenders include:

  • Holding lenders accountable for foreclosure losses resulting from loans not meeting FHA criteria.
  • Increasing net worth requirements for FHA lenders. Proposed increases would be from $250,000 to one $1 million for the first year, and to $2.5 million within the first three years.
  • Requiring lenders to assume responsibility for FHA loans originated through mortgage brokers. Brokers would no longer be individually approved for originating FHA loans.

Although critics quickly place blame on financially ill-prepared borrowers, HUD has suspended 8 lenders and rejected 270 others this year as of December 8. A combined emphasis on improving loan eligibility requirements and weeding out rogue lenders may help FHA’s bottom line, but pricing low- to moderate-income homeowners out of housing markets could prevent market recovery in areas where borrowers largely depend on FHA loans for buying and refinancing their homes.

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This entry was posted on Wednesday, December 16th, 2009 at 11:47 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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