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FHA Premiums Rising, LTVs Falling

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The secretary of the U.S. Department of Housing and Urban Development outlined to Congress a plan to increase premiums for borrowers with small down payments and decrease loan-to-values for borrowers with poor credit scores.

The housing agency is requesting authority for the Federal Housing Administration to insure $420 billion during fiscal 2011, which begins on Oct. 1, according to a transcript of HUD Secretary Shaun Donovan’s prepared testimony today before the House Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies.

The proposal includes $400 billion for the Mutual Mortgage Insurance fund, which is used to insure residential properties. The other $20 billion is for commercial mortgage and Title 1 lending under the General and Special Risk Insurance fund.

FHA accounts for 30 percent of financing on home purchases, Donovan said.

He outlined plans to require a 10 percent down payment from borrowers with FICO scores between 500 and 579, while borrowers with scores less than 500 would be ineligible. Down payments would be just 3.5 percent, however, for borrowers whose credit scores are at least 580.

HUD photo of Shaun Donovan

“These changes are being proposed after an exhaustive review of FHA’s actual claim performance data, which demonstrates that loan performance is best predicted by a combination of credit score and downpayment — simply raising one element without recognizing the impact of the layering of risk factors is not sufficient,” the secretary said. “We are considering how these changes might be applied to refinancing borrowers as well.”

An increase in the up-front FHA insurance premium to 225 basis points is expected to be reduced to 100 BPS once Congress authorizes an increase in monthly premiums to 85 BPS on 95 percent loan-to-value loans and 90 BPS on loans with LTVs above 95 percent. The new premium structure is more in line with pricing used by Fannie Mae, Freddie Mac and private mortgage insurers.

In all, $5.8 billion is expected to be generated in offsetting receipts during fiscal 2011 from the reforms.

Donovan said HUD has suspended seven lenders — including Taylor, Bean and Whitaker — and withdrawn FHA approval for 270 other firms since last year.

The testimony highlighted how the Obama administration has improved the country since taking over — when some respected economists were warning of the possibility of a second Great Depression.

“I appear before you to discuss this budget in a far different environment from that faced by the nation and the department just one year ago,” he testified. “At that time, the economy was hemorrhaging over 700,000 jobs each month, housing prices were in free fall, residential investment had dropped over 40 percent in just eighteen months, and credit was frozen nearly solid.”

He touted how just one year later, the U.S. housing market has stabilized significantly and “we are seeing real signs of optimism.” He noted that home equity began to grow again during the second quarter of last year — increasing $900 billion by September.

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