FHA Making Significant Program Changes to Support Financing

By Daniel Duffield

The commissioner for the Federal Housing Administration (FHA), Carol Galante, announced several substantial alterations to FHA qualifications, processing, and expenses, in an attempt to strengthen the organization’s finances in the Mutual Mortgage Insurance Fund (MMI Fund) to continue providing loan financing in the future.

Changes to HECM Reverse Mortgages

The announcement today provided details for plans to combine the FHA Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) with the Saver Fixed-Rate HECM. HECM, more commonly known as a reverse mortgage, is a loan product exclusively available to homeowners age 62 and up. The Standard Fixed-Rate HECM loan product comprises an overwhelming majority of the loans guaranteed by the FHA HECM program, although it places a major strain on the funds of the MMI Fund. In order to continue offering this program in the foreseeable future, the FHA plans to adjust its policies to enhance its own sustainability by making the HECM Fixed-Rate Saver the sole option for fixed-rate reverse mortgages. This Saver variant of HECM provides much-reduced closing costs for qualified borrowers, although it limits the amount of funds that borrowers can obtain and thus reduces the risks presented to the MMI Fund. This change will take effect for all FHA case numbers designated on or following April 1, 2013.

Additional Changes

Other changes which have been discussed that will be officially announced in the upcoming days include:

·         MIP Increases

Annual mortgage insurance premiums (MIP) are set to increase by 10 basis points, or 0.10% of the loan amount, with the new changes. For jumbo mortgages with principle balances exceeding $625,000, these MIP fees will increase by 5 basis points, or 0.05% of the loan amount, bringing these fees to the maximum limit as enforced by Congress. However, these fee increases will not affect certain streamline refinance transactions.

·         MIP Cancellation

The FHA is planning to reverse the existing policy in place regarding the cancellation of MIP on mortgages that reach a loan-to-value (LTV) ratio of 78%. Since the FHA assumes a significant risk in guaranteeing 100% of the outstanding mortgage balance for the entire duration of the loan, homeowners will now be required to continue paying mortgage insurance fees over this whole period. According to the FHA’s Office of Risk Management and Regulatory Affairs, the MMI Fund has taken estimated billions of dollars foregone in revenue from MIP premiums during 2010 to 2012 as a result of current cancellation regulations.

·         Manual Underwriting

The Federal Housing Administration will now mandate that lenders manually underwrite loans for borrowers with a credit score of 620 or below and with a debt-to-income (DTI) ratio that exceeds 43%. Lenders must document any compensating factors that make up for these large risks when the guidelines are exceeded, utilizing standard FHA manual underwriting and compensating factor regulations.

·         Minimum Down Payments for Jumbo Loans

The FHA will recommend the increasing of minimum down payments for jumbo loans from the current 3.5% minimum to 5%, a proposal which will be published within the Federal Register within the next several days.

·         FHA Qualification after Foreclosure

The Federal Housing Administration will henceforth attempt to dispel some of the myths regarding borrower approval after previous foreclosures, enforcing the requirements that borrowers must meet in addition to merely satisfying the waiting period of three years. This comes as the result of several lenders inaccurately promising FHA approval and automatic qualification after the seasoning period of the foreclosure has passed.

·         Housing Counseling

In the Annual Report to Congress, the FHA has disclosed its commitment to the establishment of a new housing counseling initiative that would be applicable to numerous borrower classifications, including borrowers who previously underwent foreclosure.

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