FHA Loan Expert Blog

For several years, the Federal Housing Administration has been the go-to financing resource for cash-strapped home buyers who can’t come up with a big down payment. It has zoomed from barely a 3 percent market share to nearly 30 percent of home purchase loans. But now, wildly popular FHA-insured mortgages could be on the verge of becoming more expensive and tougher to obtain.

In the wake of an independent actuarial study that found the FHA’s insurance fund reserves far below the congressionally mandated minimum, the agency confirms it is actively exploring ways to pump up its reserves - including raising insurance premiums, minimum down payments and other unspecified moves.

How might these changes affect home buyers and refinancers? FHA officials won’t discuss precisely what they’re looking at. But here’s a quick overview of some of the possibilities:

Higher down payments. FHA’s current minimum cash down payment is 3.5 percent. On a $200,000 house, a buyer can bring just $7,000 to the table, aside from closing costs. A purchase of a $500,000 house in a high-cost area requires only $17,500 in cash.

Critics say 3.5 percent does not force purchasers to have enough “skin in the game” to discourage them from missing payments or risking foreclosure. Rep. Scott Garrett, R-N.J., introduced legislation last month requiring a minimum 5 percent down payment for all future FHA loans. Ed Pinto, who served as Fannie Mae’s chief credit officer in the 1980s and is now a mortgage industry consultant, says FHA needs to move to a 10 percent minimum.

But many lenders and mortgage brokers argue that raising the limit could scuttle FHA’s core purpose - serving consumers of modest means. Jeff Lipes, president of Family Choice Mortgage Corp. near Hartford, Conn., says a move to a 10 percent minimum “would effectively eliminate FHA as an option for first-time buyers.” A 5 percent standard would reduce volume, he says, but not exclude such a wide swath of currently eligible borrowers.

Higher mortgage insurance premiums. Currently, FHA charges an “up-front” mortgage insurance premium of 1.75 percent of the loan amount. Most borrowers roll that into their loan and finance it. FHA also charges an annual premium, paid in monthly installments, of either 0.5 percent or 0.55 percent, depending on the down payment. To rebuild reserves, FHA could tweak one or both premiums to yield higher revenues. It could, for example, raise the up-front premium to 2 percent or as high as the current statutory maximum of 2.25 percent. It could also raise the annual fee, but the total premium could not exceed 3 percent under current congressional limits.

Mortgage industry officials say raising premiums would be a logical move, with a gentler impact on borrowers. Lipes calculates that on a $200,000 loan, an increase in the up-front premium to 2 percent - and a move to 0.6 percent on the annual - would raise a borrower’s monthly payment by just $10 at today’s interest rates.

Cutting home-seller “concessions” to borrowers’ loan costs. One of the big attractions of FHA financing has been the agency’s liberal allowance for seller contributions to borrowers to offset settlement and loan-related fees. The current FHA limit is 6 percent of the house price, which critics believe to be excessive. They say the policy effectively allows financially marginal borrowers to buy houses they shouldn’t, thereby raising FHA’s exposure to losses. Pinto calls the 6 percent allowance “insane on a loan with a 3.5 percent down payment.” He wants Congress to order FHA to reduce maximum concessions to 2 percent.

Toughening credit standards. In the mortgage market, FHA is by far the most lenient and flexible player when it comes to evaluating applicants’ creditworthiness. It does not have a minimum credit score, though it permits lenders to impose their own FICO score minimums. FHA also traditionally has been far more tolerant of credit history peccadilloes than Fannie Mae or Freddie Mac. When there are extenuating circumstances associated with credit problems - medical, marital or employment - FHA seeks to give applicants the benefit of the doubt.

But critics say underwriting generosity can lead to higher delinquencies, foreclosures and losses. They want FHA to toughen up. In fact, many mortgage market participants would prefer to see FHA move to the approach used by private insurers - risk-based pricing. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says FHA should calibrate premiums to a tiered system of credit scores and down payment amounts, charging more for borrowers with low down payments and low scores, and less for those with higher cash in the deal and better scores.

“If that’s what it takes to make FHA solvent, I’m all for it,” says Skeens.

Washington, DC - The U.S. House of Representatives today overwhelmingly passed H.R. 1852, the “Expanding American Homeownership Act of 2007,” which will revitalize the Federal Housing Administration (FHA), a federally insured loan program that for over 60 years has been a reliable source of affordable fixed rate mortgage loans, especially for first-time homebuyers.  The measure, originally introduced by Representative Maxine Waters, Chairwoman of the Subcommittee on Housing and Community Opportunity, and Barney Frank, Chairman of the Financial Services Committee, will enable FHA to serve more subprime borrowers at affordable rates and terms, recapture borrowers that have turned to predatory loans in recent years, and offer refinancing loan opportunities to borrowers struggling to meet their mortgage payments in the midst of the current turbulent mortgage markets.

“There is an affordable housing crisis in America.  In recent months, that crisis has exploded beyond the poorest renters and homeowners, to threaten the domestic economy.  H.R. 1852 is a necessary step in walking us back from the brink and in the direction of meeting the housing needs of all Americans,” said Chairwoman Waters.

“A revitalized FHA program will help future homeowners realize the dream of home ownership, and will prevent many first time and inexperienced home buyers from being pushed into loans that are unaffordable or difficult to understand,” said Chairman Frank.  “The bill we passed today will help people all across America because we have enacted provisions to allow the FHA to insure loans in high cost areas.”

Specifically, the bill includes the following important provisions:

Lower Down Payments.  Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment.

Housing Counseling.  Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments.

Subprime borrowers.  Directs FHA to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers.

Reverse Mortgages.  Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans.

Multifamily Loans. Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities.

Affordable Housing Fund.  Authorizes up to $300 million a year from the bill’s excess profits for affordable housing, instead of returning such funds to the General Treasury.

Higher Loan Limits.  Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets.  The amendment raises the FHA loan limit in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit.  The amendment also retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”
 
In addition, the House adopted an amendment to the bill to direct FHA to make available refinancing loans to existing qualified homeowners who are in default or at risk of default due to rate resets or mortgage market conditions, and to authorize lower down payments for such purpose.  The amendment also includes provisions to address problems arising from inflated appraisals.

(source=house.gov/apps/list/press/ financialsvcs_dem/press0918072.shtml)