FHA announces changes

FHA has announced some big changes on the heels of it's actuary report which is expected to show that the capital reserve ratio has dropped below the congressional mandate of 2%. Along with the planned changes, FHA commissioner David Steven's also announced his intention to hire a Chief risk officer for the first time ever!

“To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action,” Stevens said. “That said, given the size and scope of the FHA and its importance to today’s market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections.”

Amongst the changes, FHA will be raising the net worth requirement for FHA funding sources from $250,000 to ONE MILLION DOLLARS. Effective January 1 2010, financial institutions will have to submit yearly audited financials to FHA to prove they are adequately capitalized to meet the new standards.

Additionally, the new policies will make it more cumbersome to do 'streamline refinances'. This is a rate reduction program for FHA to FHA financing which currently requires little to no documentation to complete. FHA will now establish new requirements for seasoning, payment history, income verification and demonstrate a net tangible benefit to the borrower. The new changes provide for a collection of credit score information when available and caps the maximum loan-to-value (LTV) ratio at 125%.

Furthermore, new guidelines will be set forth on ordering appraisals for FHA-insured mortgages. Although the Home Valuation Code of Conduct (HVCC) does not apply to FHA, the plan is to adopt language from the Code to align its standards with those government-sponsored enterprises (GSEs), which fall under HVCC. Boooo!

HVCC was implemented by Fannie Mae and Freddie Mac on May 1, 2009. At that time the FHA decided not to adhere to the policy arguably increasing demand for FHA loan products as originators and Realtors alike quickly learned of the problems associated with HVCC. Although they are not requiring the use of AMC's or other third parties to order the appraisal, the new requirements do not allow any commissioned based lender staff member to order an FHA appraisal.

When it comes to ordering appraisals, currently FHA requires that the appraisal must be transferred if switching lenders. This slows the process in cases where the original lender is reluctant to transfer the the appraisal in a timely manner. The new policy allows for a new appraisal to be ordered if there are mistakes, the appraiser is on the 2nd lenders ineligible list or if the "Failure of the first lender to provide a copy of the appraisal to the second lender in a timely manner would cause a delay in closing, posing potential harm to the borrower". Potential harm includes events outside the control of the borrower such as loss of interest rate lock, purchase contract deadline, foreclosure proceedings, and late fees. FHA also reduced the length of time an appraisal can be used from 6 months to 4 months.

While lenders seeking to originate, underwrite or service FHA loans must meet the new eligibility criteria, mortgage brokers such as ourselves will still be able to originate these loans through their relationships with approved lenders, but we will no longer receive independent FHA approval of eligibility, according to the new changes.

The lenient policies of FHA have been widely critisized and called "The New Subprime". FHA loans are federally insured mortgages made available to first-time home buyers. They require down payments as low as 3.5% (but it's really less because closing costs can be rolled in) and a credit score of just 620 in contrast to 700+ required by most private lenders right now.
As the subprime market crashed and burned, less qualified home buyers returned to FHA, leading to a huge increase in FHA loan volume. Almost a third of mortgages are FHA loans now, up from just 2% in 2006. Unlike most of the Subprime loans however, FHA loans are are sold as fixed rate mortgages and require full documentation of income and assets. While the rise in delinquency has certainly been noticable, the likelihood of a Subprime-esque repeat is not high. In fact, it is more likely that inflation will cause these borrowers' incomes to rise and thanks to the low fixed rates, thier payments will remain flat. While some minor changes to FHA seem appropriate, any drastic modifications would be a "pox on both your houses", the one you own and the one next door..... that won't sell because nobody qualifies to buy it.