Significant Policy Changes For FHA Loans

WASHINGTON- David Stevens, the Commissioner of the Federal Housing Administration (FHA for short) has just today announced some thing very important. Stevens spoke of a set of policy changes that will with no doubt strengthen and improve reserves of the FHA’s capital. Doing so, it will enable the FHA to continue to provide access for homeownership for the undeserved communities, which is the FHA’s mission. These changes are the latest in a series, which were enacted by Stevens himself, to help put the FHA in a greater position to manage risk and still support the nation’s housing market recovery at the same time.

Four steps were proposed by the FHA: -Increase the mortgage insurance premium (MIP). -Update the combination of FICO scores and down payments for new borrowers. -Reduce seller concessions to three percent, from six percent. -Implement a series of significant measures aimed at increasing lender enforcement. Shaun Donovan, who is the U.S. Housing and Urban Development Secretary, previewed the changes last December. He noted that the FHA would announce more details before the end of the month of January.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important. When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. 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.” This was said by Commissoner Stevens.

The Announced Policy Changes:

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending.

The number one step is to raise the MIP. It will be raised by 50 bps to 2.25%. It will also request legislative authority to increase that maximum of MIP that the FHA is allowed to charge. If this can be enacted, then there will be a second step. This will be to shift some of the premium to the annual MIP, which will be taken from the up-front MIP. Doing this will increase the capital reserves and won’t impact comsumers as much. This is because the annual MIP isn’t paid at the time of closing. It is actually paid over the life of the loan. The initial increase of the up-front is in a Mortgagee Letter. The letter was released January 21st and will be effective in the spring of this year.

2. Update the combination of FICO scores and down payments for new borrowers.

You need at least a minimum FICO score of 580. This will allow you to qualify for a 3.5% down payment program, created by the FHA. However, if your FICO score is lower than 580, you will be required to put down at least 10%. The FHA does this to balance its risk more effectively. It will also help to those who have performed well in the past. This change will be posted in February. It will be in the Federal Register and will go in effect in the summer of this year.

3. Reduce allowable seller concessions from 6% to 3%.

The FHA is creating incentives to inflate appraised value. They are doing so because of the current level. It exposes the FHA to the excessive risk. This change allows the FHA to conform with the other industries and their standards on the issue on seller concessions. Like the change previously, it will be in the Federal Register in the month of February. It will go into effect in the summer of this year.

4. Increase enforcement on FHA lenders.

On February 1st, there will be a public report with lender performance rankings. It is to complement currently available Neighborhood Watch data. It will be available on the HUD website. This change is operational and it makes the information more user-friendly. It also hold lender more accountable. This does not require new regulatory action, because Neighborhood Watch and its date are more available to the public than before. With the FHA guidelines and standards, it enhances monotoring of lender performance and compliance. In addition to originating ID, the Implement Credit Watch is terminated through lender underwriting ID. In a Mortagagee Letter, the change is included. The letter was released January 21st. It became effective immediately.

• Section 256 of the National Housing Act, which implements statutory authority through the regulation of this, enforces indemnification provisions for lender. It used a delegated insuring process. The specifications will be posted in March and then, because of a notice and comment period, will go into effect in the early summer of this year. HUD wants to increase enforcement on FHA lenders by pursuing legislative authority. Here is what the 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. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

Ultimately, the FHA is continuing to review its overall response. This response to the issues of housing market conditions and continuing to evaluate its mortgage insurance underwriting standards helps the distressed and underwater borrowers. It helps the borrowers through the FHA/HAMP and other FHA initiative. All this is going forward and will hopefully create a huge impact on the ways of housing.

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