Shoring up the FHA: Housing agency tightens underwriting policies

LAS VEGAS (MarketWatch) — The Federal Housing Administration said Wednesday that it would raise down-payment requirements, boost its mortgage-insurance premiums and tighten its loan underwriting practices in a bid to strengthen its capital reserves and remain solvent in the face of rising foreclosures and delinquencies.

FHA Commissioner David Stevens said the policy changes announced Wednesday were the latest in a series of measures the agency has taken since September to address increasing risk in the housing markets.

The measures announced Wednesday include the following:

  • An increase in the mortgage-insurance premium. The premium will rise to 2.25% of the loan amount, up from 1.75%. The FHA will seek legislative authority for the hike, which would apply both to the up-front and annual premiums it charges. The FHA does not make loans itself, but provides a government guarantee against default for mortgages issued by approved lenders. The mortgage premium is split between an up-front charge paid at closing and an ongoing annual fee. The new premium rate will go into effect in the spring.
  • A hike in FICO score requirements. New borrowers will now be required to have a minimum FICO credit 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 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.
  • A reduction in allowable seller concessions from 6% to 3%. The current level exposes the FHA to excess risk by creating incentives to inflate appraised value, according to Stevens. 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.
  • Increased enforcement on FHA lenders. The agency will publicly report lender-performance rankings to complement currently available Neighborhood Watch data, which will be available on the HUD Web site starting Feb.1. Stevens said 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. The agency will also enhance monitoring of lender performance and compliance with FHA guidelines and standards. The changes are effective immediately.
  • A series of proposed additions to FHA legislative authority that would further tighten reins on lenders.

In addition to the changes proposed Wednesday, Stevens said the FHA is continuing to review its overall response to housing-market conditions, as well as continuing to evaluate its mortgage-insurance underwriting standards and its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives.

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