FHA Changes to Come....

FHA is making changes in order to sustain the increased exposure they've experienced due to the "SUB-PRIME" collapse.  After all FHA is technically "SUB-PRIME"...

First they are increasing the "UP-FRONT" MIP factor to 2.25% - most of the people attaining FHA loans will not even bat an eye at this increase.  The savy will not like and may choose to explore conventional alternatives but more often than not will probably go unnoticed by most.

Second, also not that important to most FHA is imposing a minimum credit score of 580 for 3.5% financing - more often than not lenders have already imposed a 620 minimum.  Those that haven't require so much paperwork and drag out the process that it's almost not worth it anyway.

Third (THE MOST IMPORTANT PART), limiting the amount of closing costs a seller can contribute from 6% down to only 3% is going to have an affect on the total out of pocket of many future buyers using the FHA for financing.  The higher balance loans will not be affected nearly as much as the lower balance loans.  For example take a $80,000 purchase the max the seller can contribute is $2400.  Of which up to 50% can be eaten up by the 1st year's worth of homeowner's insurance, the other half will go to fund the escrow account and pay title costs....Leaving zero for the lender.  Not an issue for some but will cause INTEREST RATES TO RISE for those that don't have the liquid cash to pay additional costs out of pocket.

Lastly the FHA says they are going to increase enforcement - this probably won't affect borrowers but may make it a little easier for them to make a decision as to which lenders have the best reputation....

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
   • The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
   • If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
   • 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 initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
     
     
2. Update the combination of FICO scores and down payments for new borrowers.
   • New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
   • This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
   • This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
     
     
3. Reduce allowable seller concessions from 6% to 3%
   • The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
   • This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
     
     
4. Increase enforcement on FHA lenders
   • Publicly report lender performance rankings to complement currently available Neighborhood Watch data - Will be available on the HUD website on February 1.
     • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
   • Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
     • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
     • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
   • Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
     • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
   • HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
     • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
     • Legislative authority permitting HUD maximum flexibility to establish separate "areas" for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

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