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Sweeping FHA Changes

Premiums, downpayments and seller contributions impacted

Jan. 20, 2010

By MortgageDaily.com staff


The Federal Housing Administration will increase insurance premiums, tighten downpayment requirements and reduce seller contributions. It also plans to step up its pursuit of mortgagees that operate outside FHA guidelines.

Borrowers who make a 3.5 percent down payment in connection with an FHA-insured loan will be required to have a credit score of at least 580, according to HUD letter No.10-016 today. Credit scores less than 580 will require a 10 percent down payment.

FHA said that the change, which will go into effect by early summer, will enable it to better balance its risks.

The Mortgage Bankers Association issued a statement indicating that while FHA borrowers might have to pay more, the changes are needed to reduce the stress that the housing downturn has put on the housing agency.

The up-front FHA mortgage insurance premium will be raised 50 basis points to 2.25 percent. The new fee will be included in a mortgagee letter tomorrow and will be implemented in the spring.

In addition, legislative authority will be requested to increase the maximum annual FHA premium and -- if granted -- some of the up-front premium will be shifted to annual premiums.

"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 letter said.

In an attempt to reduce the likelihood of inflated appraisals, FHA said maximum seller concessions will be reduced to 3 percent from 6 percent. The expected implementation date is early summer.

"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," FHA Commissioner David Stevens said in the statement. "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."

FHA also said it will publicly report lender performance rankings and enhance monitoring of lender compliance with the agency's guidelines as it increases enforcement on FHA mortgagees. HUD is additionally pursuing legislative authority to increase enforcement on FHA lenders.

"MBA supports FHA's efforts to root out those lenders who pose undue risk to the program," MBA Chairman Robert E. Story Jr. said in the statement. "We will work with FHA to ensure those efforts include fair and thorough investigations and appropriate due process for lenders who could be impacted."

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