I wanted to take a moment to make sure you are familiar with events surrounding a sweeping set of policy changes for FHA announced earlier this week. The announcement details the changes that Secretary Donovan promised to deliver by the end of January when he testified before Congress last month.
The new policies are designed to strengthen the FHA's capital reserves so we can continue to fulfill our mission of serving underserved communities. In addition, we were determined that these changes should support, not disrupt, the nation's housing market recovery. Bringing these changes to market has been the result of a lot of hard work and long hours. And, I am proud to have worked with so many of you on this initiative.
What changes will be implemented? We announced the following on January 20:
- Increase the up-front mortgage insurance premium (MIP) to 2.25%;
- Update credit score and down payment requirements for new borrowers;
- Reduce seller concessions to three percent, from six percent; and
- Implement a series of significant measures aimed at increasing lender enforcement.
When combined with the risk management measures announced in September of last year, these new changes are among the most significant steps ever taken by FHA to address risk. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market's recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.
Let's go into more detail:
Announced FHA Policy Changes:
1. Increase the MIP to build up capital reserves and bring back private lending.
o The first step will be to raise the up-front MIP by 50 basis points to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
o If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
o This shift will allow for the capital reserves to increase with less impact on the consumer because the annual MIP is paid over the life of the loan instead of at the time of closing.
o The initial up-front increase is included in Mortgagee Letter 2010-02 and will go into effect in the spring.
2. Update the combination of credit scores and down payments for new borrowers.
o New borrowers will now be required to have a minimum credit score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 credit score will be required to put down at least 10%.
o This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
o 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.
3. Reduce allowable seller concessions from 6% to 3%.
o The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
o The 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.
4. Increase FHA lender enforcement.
o Publicly report lender performance rankings to complement currently available Neighborhood Watch data which will be accessible via www.hud.gov on February 1.
§ 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.
o Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
§ Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
§ This change is included in Mortgagee Letter 2010-03 and is effective immediately.
o Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process.
§ Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
o HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
§ Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite.
§ Legislative authority permitting HUD maximum flexibility to establish separate "areas" for purposes of review and termination under the Credit Watch initiative.
Note: This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches.
In addition to the changes I have outlined, we are continuing to review FHA's overall response to housing market conditions, to evaluate its mortgage insurance underwriting standards, and to improve its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives going forward.
I know this is a lot of information to absorb. Listed below are links to some of the major stories about the announcement. I promise to keep you aware as we implement these changes going forward.
Wall Street Journal (Nick Timiraos, 1/20) "FHA Sets Tighter Lending Requirements" The Federal Housing Administration is implementing more-stringent lending requirements and higher borrower fees to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency. LINK
Washington Post (Dina ElBoghady, 1/20) "FHA plans to require borrowers to produce more cash for downpayments" The Federal Housing Administration plans to increase the amount of up-front cash paid by all new borrowers and to require higher down payments from those with the poorest credit, according to agency officials. LINK
Chicago Tribune (Mary Ellen Podmolick, 1/20) "FHA homeownership rules to change" The Federal Housing Administration announced changes Wednesday that will make it more expensive for homebuyers to secure agency-backed mortgages while some consumers will be priced out of the housing market. LINK
CNNMoney.com (Tami Luhby, 1/20) "FHA loan requirements will make it harder to get a mortgage" It's going to be harder to get a government-backed mortgage from now on. LINK
CNBC.com (Diana Olick, 1/20) "FHA Boosts Insurance Premiums to Cushion Defaults" In a move to shore up the FHA's beleaguered balance sheet, Commissioner David Stevens on Wednesday announced big changes at the government mortgage insurer that now backs about half of all home loans to the nation's minorities. LINK
I want to thank you for your efforts to keep this housing system on track. The role of the Real Estate Agent, Mortgage Lender, Settlement Service Provider, and all who make the dream of homeownership a reality, is critical to stabilizing this economy. Your work is for a good cause. We really are making a difference in people's lives. Thanks for the partnership!
If you have ever had an FHA loan, Uncle Sam may owe you a refund. HUD has been stepping up efforts lately to identify people who have a refund due, but have not collected. "Could that be me", you ask? Let's find out.
