HUD announces important changes to popular FHA program

Posted on by Evan in FHA

Two days ago HUD announced changes to the popular FHA loan program.  The changes are designed to “strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for undeserved communities.“

If you’ll recall last September FHA announced that their capital reserves (used to insure FHA mortgages) fell below mandated levels.  These changes are designed to raise more money to boost those reserves and tighten their underwriting requirements so that the loans they are insuring are less risky.

These changes take effect for loan applications after April 5th, 2010.  I’ve underlined what I think are the most relevant changes for consumers and real estate professionals to be aware of:

  1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
    • The first step will be to raise the up-front MIP by 50 bps to 2.25% (it is currently 1.75%) and request legislative authority to increase the maximum annual MIP that the FHA can charge.
    • 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 (this will increase monthly payments).
    • This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
    • The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
  2. Update the combination of FICO scores and down payments for new borrowers.
    • New borrowers will now be required to have a minimum FICO 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 allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
    • 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% (this will make it more difficult for first-time homebuyers to buy-down their rate and/ or require they have more cash to close)
    • 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.
    • 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.
  4. Increase enforcement on FHA lenders
    • Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website 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.
    • 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 a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
    • 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.
    • 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. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches