The FHA is reeling from rising defaults in its mortgage business. By law the agency must set aside 2% cash to deal with unexpected losses. As of September 30, those reserves had dropped from almost $13 billion to just over $3.6 billion. This total represents only one-half of one percent of all outstanding single-family-home loans insured by the FHA, the first time since 1994 that it has been this low.
At a hearing before the House Financial Services Committee last week, HUD Secretary Shaun Donovan told the members that his agency has not done a very good job in managing the housing crisis. The FHA’s share of mortgages is 30 percent of all mortgage origination (and rising) and 20 percent of loan refinancing.
How do FHA authorities propose to turn things around? According to a senior HUD official there are several options under consideration.
First, the FHA has identified “abusive lenders” and suspended business with seven of them and withdrawn its approval for 270 others. Lenders that make FHA insured loans will face stiffer restrictions to keep the abusive lenders from financing risky borrowers.
Currently, the borrower is required to have a minimum down payment of 3.5 percent. Legislation has already been introduced to increase that to 5 percent.
Sellers may now kick in a maximum 6 percent of the home’s value towards the buyer’s closing costs; it has been proposed to lower that to 3 percent.
Monthly mortgage insurance premiums may be raised. This is currently under review.
The minimum credit score will be raised. It has not yet been decided what the new minimum score will be.
The FHA has asked Congress to give it more power to close down abusive lenders. It is also working on mandating that banks they do business with have up to $2.5 billion in capital, instead of the current $250,000 to repay the agency if a bank is found to be involved in fraudulent dealings.
On the one hand, it is going to cost more for a l0t of people who don’t have extra cash, to get an FHA loan. Which is too bad since the home buyer credit has been extended and this could be a great market for buyers. On the other hand, FHA has to make sure buyers are sound, and they need to get rid of the ‘abusive lenders’ who are conning people into mortgages they can’t afford. If they don’t, the taxpayer will be on the hook for even more!
Making guidelines stricter may make it harder for buyers in the near term, but it may make for a more stable housing market in the long run.