FHA Will Announce Changes Next Week

In October 2009, FHA announced that its capital reserve fund had fallen below the congressionally mandated level of 2 percent. The drop in capital reserves has led Congress and the Administration to call for changes to strengthen FHA.

The week of January 18, 2010, FHA will announce major changes to ensure its long-term financial soundness. FHA is trying to balance three fundamental objectives: 1) financial soundness – ensuring that its capital ratio returns above 2 percent, 2) fulfilling its mission of serving borrowers not adequately served by the private sector and 3) facilitating the recovery of the housing industry and the over-all economy.

NAR has met with the Commissioner on several occasions to discuss the state of the housing market and to underscore FHA’s invaluable role. In looking for solutions to FHA’s financial concerns, replenishing the insurance fund and lowering loan-to-value ratios have the most significant impact on the FHA’s actuarial soundness. We expect changes in the following areas:

Improve FHA loan quality:
Increasing “upfront cash” that a borrower has to bring to the table by:

Eliminating the ability to finance the upfront premium
Increase the cash investment required above 3.5 percent by:
o Reduce seller concessions from 6 percent to as low as 3 percent
o Impose a minimum FICO score
Down payment requirement will remain at 3.5 percent
Impose a loan-to-value (LTV) maximum ratio by FICO score

Increase the Mortgage Insurance Premiums:
FHA can increase the MIP as follows:
Up-front premium may be raised to 2-2.25 percent, up from 1.75 percent
Higher premiums may be introduced for certain FHA products (such as refinance transactions)

FHA Lender Eligibility Changes
FHA is requiring significant changes for lenders. Many changes recommended were published as a proposed rule on lender eligibility changes in late November. Final rule has not yet been published. There are several proposed changes for FHA lenders:
Elimination of loan correspondent approval process
Increase net worth requirements of lenders to $2.5 million over the next 3 years
Lenders will be required to have a net worth of $1 million within one year, of which 20 percent must be liquid assets
Implementation of Credit Watch for underwriting lenders to monitor defaults and claims
Codification of Mortgagee Letter 2009-31, which places additional requirements on FHA lenders

Risk Management Improvements
FHA will be overhauling its approach to risk management throughout 2010. FHA will likely begin targeting early payment defaults for reviews and loans that result in claims in the first couple of years.


Risk Management Improvements (Continued) This change will likely increase indemnification requests since FHA will be targeting their reviews on early payment defaults (i.e. loans with potential problems).

FHA will be highlighting “poor performing” lenders more prominently on their website and in press releases. This started in January when FHA and the HUD Inspector General announced subpoenas to 15 mortgage companies demanding data and documentation on failed loans.

The Commissioner has frequently discussed the development of a Lender Scorecard, which is expected in the near future.

FHA Budget Proposals (Requires Legislation) As part of the Administration’s FY 2011 budget proposal there will be several FHA legislative initiatives. They could include:
Increase the current cap for annual premiums, currently at .55 percent (FHA has said that raising the annual premium is the “most effective means of raising capital for the fund w/ least impact per borrower”)
Obtain a legislative change to Credit Watch to facilitate the suspension of an FHA lender’s entire operation not just individual branches
Increased accountability of FHA lenders for fraud or misrepresentation

These changes will require congressional action, the timetable for enacting and implementing any legislation is subject to the Congressional schedule.

Conclusion
FHA will be transformed over the next few years. The changes outlined above are the beginning of the process with additional changes expected during the tenure of FHA Commissioner Dave Stevens. Going forward, FHA will continually evaluate programmatic changes and will likely withdraw them when the capital ratio returns above 2 percent. However, it is unlikely FHA will relax risk management and lender monitoring enhancements.


http://www.realtor.org/government_affairs/fha_resources