Applicants for home loans will find new rules at Federal Housing Administration

November 30, 2012

You may have seen headlines last week about the Federal Housing Administration’s needing a taxpayer bailout and wondered: Uh-oh. Is the FHA heading down the fiscal drain like Fannie Mae and Freddie Mac, which have required billions in federal assistance just to stay in business?

The good-news answer for FHA’s traditional borrowers — who include moderate-income, first-time purchasers with limited cash for down payments and less-than-perfect credit histories — is no. There is a strong possibility that FHA will not require any money from the Treasury, and any such transaction would not occur until next September. Meanwhile FHA is making tweaks to its program rules that could affect some loan applicants in the months ahead; these fixes are designed to improve revenue flows to the agency and cut back on losses.

Among the most immediate changes: Starting early next year, new borrowers are likely to be charged slightly higher annual mortgage insurance premiums: 1.35 percent of the loan balance rather than 1.25 percent at present. On loans above $625,500 in high-cost areas such as California and metropolitan Washington, the annual premium will go from 1.5 percent to 1.6 percent. This will not be a major problem for most people, but it may cause some buyers to check out FHA’s competitors: private mortgage insurers whose premiums on loans for applicants with high credit scores may be more attractive than FHA’s.

To increase revenue streams long-term, FHA is also abandoning its practice of allowing borrowers to cancel their mortgage insurance payments when their loan balance drops to 78 percent of the property’s value. In effect, this will mean that future borrowers obtaining 30-year FHA loans could be paying premiums for decades.

Is this a big deal? Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, Calif., thinks it might encourage some borrowers with higher credit quality to “refi out” of their FHA loans and seek better deals in the conventional marketplace. But Paul E. Skeens, president of Colonial Mortgage Group in Waldorf, sees it differently: With fixed 30-year mortgage rates in the mid- to upper-3 percent range and virtually certain to increase — maybe significantly if the economy improves in coming years — “everybody is going to want to keep these loans forever,” he predicts. “They’re not going to want to refi.”

Other changes on the FHA horizon:

●More financial counseling for high-risk applicants who have low FICO credit scores, are purchasing their first homes and are seeking to make FHA’s minimum 3.5 percent down payments.

●A short-sale program for FHA homeowners who are seriously delinquent and heading toward foreclosure. FHA Acting Commissioner Carol J. Galante said the agency plans to streamline the short-sale option — where owners sell their house for less than the balance on the mortgage — in order to avoid the huge costs that foreclosures impose on FHA’s insurance fund.

●Structural alterations to FHA’s reverse mortgage program, which allows senior homeowners to withdraw funds based on the equity in their properties. The program dominates the industry and accounts for the vast majority of outstanding reverse loans, but it has produced inordinate losses to the FHA insurance fund because of home-value declines and the failure of some borrowers to make their property tax and insurance payments, thereby triggering foreclosures. Though few details are yet available and Congress would have to approve any statutory changes, Galante said the agency plans to restrict the amounts that seniors can draw down in a lump sum upfront, among other remedial actions next year.

Galante’s predecessor as commissioner, David H. Stevens, now chief executive of the Mortgage Bankers Association, said in an interview that FHA also needs to consider requiring reverse-mortgage applicants to have sufficient income and assets so that they don’t blow through their initial drawdowns and have nothing left over to pay taxes and insurance. Currently there are no such qualification standards.

The bottom line on FHA’s forthcoming program tweaks? Jeff Lipes, vice president of Rockville Bank in Hartford, Conn., put it this way: FHA isn’t making fundamental changes. Its basic mix of enticements — low down payments, low credit-score requirements and generous underwriting rules compared with competitors — aren’t going away, “so I don’t think [the tweaks] will have that great an impact on most FHA buyers.”

Ken Harney’s e-mail address is kenharney@earthlink.net.

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