In the “you know that it was too good to be true” department, the Federal Housing Administration is about to make it more expensive and more difficult to get an FHA mortgage loan. Why? Money is drying up and the FHA believes it has to protect its very survival. Here’s the story.
Historically, the FHA has been a stable, but largely behind-the-scenes player in the U.S. mortgage market. According to the FHA’s own figures, the agency’s share of the new mortgage loan market was less than 4% back in 2006. That was when mortgage buyers were being lavished with “no doc, no down payment” loans from subprime lenders, and fewer consumers had any use for stable, 30-year fixed-rate mortgages.
But the FHA rode in on a white horse to offer U.S. mortgage customers loans with only 3.5% of the total mortgage needed as a down payment. The FHA approval guidelines were relaxed too. The agency approved mortgages for borrowers with lower credit scores than most banks were allowing. In addition, the FHA was more liberal on bankruptcies — forgiving them after two years, while ignoring a foreclosure once three years had passed.
Mortgage customers got on board in a hurry, and by the end of 2008, the FHA was responsible for about 21% of the U.S. new mortgage market, according to figures released by the federal government under its Home Mortgage Disclosure Act. The agency is also currently responsible for 30% of mortgage refinancings, says the U.S. Department of Housing and Urban Development.
That growth has given the FHA a case of the willies, and now it’s about to do something about it, if the HUD has anything to say about it. In testimony to Congress last week, Secretary Shaun Donovan says that his agency is strongly considering steps to rein in mortgages issued by the FHA.
Already, HUD has taken some steps to beef up FHA’s financial credibility. It has suspended seven lenders, and withdrawn FHA approval for 270 other U.S. lenders. The agency has tightened requirements on its “Streamlined Refinance” program, offered new rules on appraisals and has hiked net worth minimums for all FHA lenders. HUD has also brought aboard a Chief Risk Officer to manage the agency’s risk vulnerabilities in the volatile credit market.
Those changes are already in the pipeline, and now some new ones are being added as well. In his testimony before the House Committee on Financial Services, Donovan told the panel that HUD would be “implementing additional measures that we believe will further reduce the risk to the FHA portfolio.”
Those changes include ...
- The release of a new “Lender Scorecard” that will summarize the performance of FHA lenders.
- Raising the minimum FICO score for new FHA borrowers (no specific numbers have been released yet and Donovan implied the hike could be temporary).
- A hike in the down payment required for new mortgage borrowers (the exact number is still being hashed out, Donovan told Congress).
- New rules that will make FHA consumers shoulder more of the closing costs when buying a home.
Clearly, the federal government feels compelled to step in and tighten some of those relaxed lending rules that millions of Americans have already enjoyed. For now, the rules don’t seem too onerous, and we’ll need more specifics in terms of credit rating increases and down payment hikes.
But if the FHA is going to take more of the burden in the mortgage lending market, it’s good policy — and good politics — to tighten the screws a bit.
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