Monday, January 29, 2018 / by Sean Zanganeh
The Federal Housing Administration is implementing more-stringent lending requirements and higher borrower fees to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.
The FHA said Wednesday it will raise insurance fees that borrowers must pay, and it will cap the amount of cash that sellers can contribute for closing costs. It will also require higher down payments for the borrowers with poor credit scores, below 580.
"These changes are overdue," said David Stevens, the FHA commissioner, speaking to reporters. "FHA has a responsibility to be fiscally sound" and to provide homeowners with "financing that's going to give them the ability to live in their home long term."
The FHA, which backs as many as half of all new loans in certain housing markets, has come under fire for insuring home buyers who have put little or no money down as prices have plunged over the past three years. With its reserves falling sharply, the agency has been forced to walk a tightrope between protecting taxpayer dollars and helping to facilitate the housing recovery.
Josh Levin, a research analyst at Citigroup Inc., said the changes were less restrictive than expected and illustrated the "broader point that the federal government will likely find itself unable to extricate itself from support for the housing market."
Mr. Stevens characterized the changes as "significant but not overwhelming," and predicted that there would be "on the margin some curtailment of potential homeownership."
Starting this summer, borrowers with credit scores below 580 will be required to make a minimum 10% down. While the FHA doesn't have a credit-score cutoff, most lenders require a minimum 620 score. Fewer than 1% of FHA borrowers last year had credit scores below 580, according to LPS Applied Analytics.
The FHA opted not to raise minimum down payments for most borrowers, which are set at 3.5%. Some analysts had pushed for higher down payments and one bill in Congress would raise down payments to 5%.
Industry trade groups are strenuously opposed to such increases, and government officials, sensitive to concerns that tightening credit standards could hurt fragile housing markets, opted for less restrictive measures. "The FHA tightening arguably has no bite and is clearly a non-event," said Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm, who called the changes a "major coup" for the housing industry.
The FHA, which currently insures more than one-third of all new home loans, doesn't lend money to home buyers; instead, it insures lenders against default on loans that meet FHA criteria.
In exchange for FHA backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan. The FHA said Wednesday it will raise that fee to 2.25%, the second increase in the past two years. The change will go into effect this spring.
Also to boost its reserves, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually. If approved, that would allow the FHA to boost the annual fee while easing the upfront fee.
The FHA also will reduce the amount of money that sellers can kick in for closing costs to 3% of the sale price, down from the current level of 6%. The higher cap led to abuses where sellers "heavily marked up the purchase price" to compensate for their contribution, says Lou Barnes, a mortgage banker in Boulder, Colo.
The value of the FHA's reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding and down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio and if the agency were to run short of cash to cover projected losses, it likely would have to ask Congress for money for the first time ever. If the larger insurance fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.
Mr. Stevens said he expected that the agency's performance could see some "bumps and bruises in the months ahead" but said it was generally "headed in a positive direction."
The FHA also announced a series of measures to boost its ability to police lenders that originate loans with FHA backing, and the agency will ask Congress for greater authority to take action against lenders who originate loans with high rates of default.
"Mortgage lenders will find the new rules painful but necessary," said Howard Glaser, an industry consultant. He says the rules were past due given that "an 'anything goes' environment" had prevailed in recent years as former subprime brokers migrated into FHA-backed loans.
See Full Article Here at Wall Street Journal by Nick Timiraos
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