FHA plans to require borrowers to produce more cash for down payments
Wednesday, January 20, 2010
The Federal Housing Administration plans to increase the amount of up-front cash paid by all new borrowers and to require higher down payments from those with the poorest credit, according to agency officials.
These policy changes, scheduled to be announced on Wednesday, are part of the agency's effort to beef up its ailing finances, which have been eroded by rising defaults in its increasingly popular flagship mortgage insurance program. The FHA currently backs about 30 percent of all loans for home purchases and 20 percent of refinanced loans.
Under this plan, the agency would increase the up-front insurance premium that borrowers pay at the closing table from 1.75 percent to 2.25 percent of the loan's value starting this spring.
While most FHA borrowers can continue to make down payments of as little as 3.5 percent when they take out a loan, those with a credit score of less than 580 will have to make a down payment of at least 10 percent, possibly starting in the early summer.
The agency also plans to propose limits on the amount of money sellers can kick in, including by paying closing costs or giving free upgrades. The agency will reduce seller concessions from 6 percent to 3 percent of the home's value, in line with the industry norm, this summer.
FHA Commissioner David H. Stevens described these changes as some of the most significant steps the agency has ever taken to protect itself against risk.
"Striking the right balance between managing the FHA's risk, continuing to provide access to underserved communities and supporting the nation's economic recovery is critically important," Stevens said in a statement.
The broad outlines of these initiatives were first announced by Housing and Urban Secretary Shaun Donovan at a House hearing last month, but the details were not released until now because the agency was analyzing its options.
In the past, the FHA has resisted raising down payments or insurance premiums for fear of shutting out qualified borrowers and stunting the housing market's slow but steady recovery. But Donovan said the exploding volume of loans the FHA is now handling requires stricter controls than the previous administration had in place.
These new initiatives do not require congressional approval, but the proposed seller concessions and the tougher down payment requirements calls for a public comment period. Minor changes could be made based on the feedback.
The agency is also asking Congress for authority to raise the limit on annual premiums that FHA borrowers must pay. If approved, the move would allow the FHA to shift some of the upfront premium increase to yearly premiums. That would boost the agency's capital levels but put less burden on consumers because the annual cost is spread out over time, officials said.
David Berenbaum, chief program officer of the National Community Reinvestment Coalition, a housing advocacy group, described FHA's proposals as "prudent."
"The burden to the individual borrower is modest and should ensure, overall, that borrowers have access to responsible credit," Berenbaum said in a statement. "While some less credit-worthy borrowers will need higher down payments, this is a necessary move in markets where a decline in home value can wipe out a new buyer's equity within weeks after the settlement."
The required 580 score is slightly above the minimum 500 currently required by the agency, but well below what many FHA lenders require and far below the national 720 median. By toughening its requirements, the FHA hopes it will leave less leeway for abusive lenders to get away with issuing loans that more reputable lenders have rejected.
Berenbaum said in an interview that the FHA has taken a critical look at how its loan portfolio is performing and determined that loans to borrowers with credit scores above 580 perform well.
The FHA will also ask Congress to grant it more authority to close down abusive lenders.