FHA Announces Four “Immediate Actions” Which Raise Costs, Lower Defaults
The Federal Housing Administration (FHA) is readying to raise its mortgage qualification standards.
In a letter sent to U.S. Senator Bob Corker, FHA Commissioner Carol Galante outlined the agency’s plans to rebuild its dwindling reserves, and to shrink the FHA’s share of the overall mortgage market. The FHA is acting on that letter.
Commissioner Galante committed to “aggressive action”, including raising minimum credit score requirements, raising downpayment requirements on jumbo-sized loans, and restricting access to FHA mortgages after a foreclosure.
The FHA changes may impede your ability to get a loan beginning April 1, 2013.
About The FHA
The Federal Housing Administration is not a mortgage lender. Rather, it’s an insurer of mortgages. Much like an issuer of homeowners insurance, the FHA pays claims to mortgage lenders when damage (i.e. loss) occurs. With respect to FHA lending, a loss occurs when a loan goes into default.
The Federal Housing Administration was formed in 1934 by congressional mandate. It was meant to aid an ailing housing market. At the time, lenders offered very little in the way of affordable housing options. Most mortgages were “balloon mortgages” of three or five years; and required a downpayment of 50% or more.
Via the FHA, better loan terms became available.
The agency published — and continues to publish — a set of “approvable” loan traits which, collectively, are known as mortgage guidelines. So long as a loan meets these minimum requirements, the FHA will provides insurance to the lender making the loan.
Since 1934, FHA mortgage guidelines have morphed, loosening in some areas and tightening in others such that today’s FHA approval standards likely have little resemblance to those of 80 years ago. However, the Federal Housing Administration’s purpose is the same — to help promote affordable housing options nationwide.
Oh, and one more thing : The FHA was formed to be taxpayer-independent.
The Federal Housing Administration self-funds via generated income and it’s the only government agency that can make that claim. Unfortunately for today’s home buyers, in order to remain taxpayer-independent, the agency has said it will change its guidelines.
The FHA’s 4 Immediate Actions
The Federal Housing Administration is self-funded via its Mutual Mortgage Insurance (MMI) fund. These are the reserves from which FHA loan default claims are paid, and into which FHA mortgage insurance premiums (MIP) are paid.
By law, the Federal Housing Administration is required to keep $2 in its Mutual Mortgage Insurance fund reserve account for ever $100 insured. For many years, this was not a problem and the agency carried surplus reserves. This surplus spurred a gradual loosening of FHA guidelines because the agency’s risk tolerance grew — specifically throughout periods during which loans were defaulting at historically-low rates.
2006-2009 was not one of those periods, though. The FHA was not prepared for it.
Reserve ratios fell sharply. In 2007, the FHA held $6.40 for every $100 insured, and then the foreclosures began. Losses mounted and claims were paid en masse. By 2009, the FHA’s reserve ratio dropped below the mandatory 2% threshold. By 2011, it was down to $0.24 per $100 insured.
The most recent Federal Housing Administration audit shows the group’s reserves in negative territory.
And, this was the backdrop for Commissioner Galante’s letter.
To help assuage its critics, the FHA announced four “immediate actions” it planned to undertake in order to restore its financial health. None of them are particularly good for buyers, nor are they good for would-be refinancing households using the FHA Streamline Refinance.
The changes are highlighted below.
This article was provided by Kara’s Guest Blogger: Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage
Posted on March 11, 2013, in Finance and tagged Buy a Home, Buyer, FHA, Finance Me, Fort Myers, Lender, Loan, Mortgage, Property Guiding, Real Estate Financing, SWFL Real Estate. Bookmark the permalink. Leave a comment.