Tougher FHA Increases Premiums, Credit Standards

FHA Commissioner David StevensIn new policies aimed at bolstering its depleted reserves, Federal Housing Administration officials today announced tougher measures for borrowers, including higher mortgage insurance premiums, tighter credit scoring requirements and higher down payments.
The FHA also is reducing seller concessions to three percent, from six percent to diminish “incentives to inflate appraised value.” The agency is also implementing a series of “significant measures aimed at increasing lender enforcement.”
“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,” said FHA Commissioner David Stevens in a statement.
The FHA does not lend to home buyers, but provides mortgage insurance for those who meet its down payment requirement and other standards. In the ongoing credit crunch and foreclosure crisis, the agency’s business has skyrocketed as private mortgage lenders have further tightened credit. The FHA currently insures about 30 percent of home purchase mortgages, up from about 3 percent a few years ago.
However, FHA reserves to cover losses have plummeted to $3.6 billion, or to about 0.5 percent of the $685 billion of insured loans the FHA has in force — well under the 2 percent coverage ratio required by Congress.
In its new policy outlined today, here are the highlights:
Mortgage insurance premium (MIP): The first step will be to raise the up-front MIP by 50 basis points to 2.25 percent and request legislative authority to increase the maximum annual MIP that the FHA can charge.
FICO Scores and down payments: New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5 percent down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10 percent.
Allowable seller concessions: “The current level exposes the FHA to excess risk by creating incentives to inflate appraised value,” the FHA said. Seller concessions will be reduced from 6 percent to 3 percent.
Increased enforcement of FHA lenders: Lender performance rankings will be made public to complement currently available Neighborhood Watch data on HUD’s website on February 1.
Housing and Urban Development Secretary Shaun Donovan, in testimony before a U.S. House panel in December, previewed the  proposals in an effort to minimize risk and protect the FHA from depleting it’s reserves entirely.
“The bottom line is this: the loans FHA insures must be safe and self-sustaining for the taxpayer over the long-term,” Donovan said in statement before testimony to the House Financial Services Committee.

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