The Federal Housing Administration will tighten credit standards and implement new rules for appraisals on Jan. 1, saying a study to be published in November is expected to show FHA’s capital reserve ratio slipping below mandated minimums.
FHA’s insurance fund is sufficient to cover future losses, Federal Housing Commissioner David H. Stevens said, but the tighter policies will ensure that the loan guarantees remain self-sustaining and continue to be funded by premiums paid by borrowers, not taxpayers.
The new policies also include guidelines for ordering appraisals that are intended to protect appraisers from pressure by lenders. The new guidelines will ensure FHA appraisal policies are in "full alignment" with rules employed by Fannie Mae and Freddie Mac since May 1, the Department of Housing and Urban Development said in a press release.
Realtors, homebuilders and lenders have complained that the new rules governing appraisals for Fannie and Freddie — the Home Valuation Code of Conduct — have derailed home sales since they were implemented. The rules have led to an increased use of appraisal management companies who sometimes hire appraisers with little experience in the markets they are asked to value properties in, critics say.
A spokesman for the Appraisal Institute, a trade association representing appraisers, told Inman News that FHA’s new appraisal guidelines differ in some important ways from Fannie and Freddie’s and, if enforced, could alleviate some of the problems experienced with the Home Valuation Code of Conduct.
FHA is also placing new requirements on streamlined refinancings, including payment history, income verification, and demonstration of net tangible benefit to the borrower. Borrowers must have made at least six months of payments in order to qualify under the new requirements, for example.
FHA-approved lenders will be required to submit audited annual financial statements to FHA — something many must already do for regulators, Fannie and Freddie, or their own investors.
Other rule changes that are subject to a public comment period and will take effect at a later date include a proposal for FHA-approved lenders to assume liability for loans they originate or underwrite.
The rule change — in effect transferring the risk of loans originated by mortgage brokers from FHA to lenders who fund the loans — is already the policy at Fannie Mae and Freddie Mac.
FHA would no longer approve individual mortgage brokers, allowing any mortgage broker to originate FHA-guaranteed loans through approved lenders who would be responsible for their actions.
The rule change could potentially increase the number mortgage brokers eligible to originate FHA-insured loans while providing for more effective oversight, HUD said.
But HUD also proposes to increase the net-worth requirement for approved mortgagees from $250,000 to $1 million — a move that could exclude many smaller companies from FHA lending. The requirement has not been increased since 1993 and is currently below industry standards, HUD said.
The Mortgage Bankers Association issued a statement saying it has long advocated a higher net-worth requirement for FHA lenders, but noted that it "is just as important that any new requirements be reasonable and not unduly hamper competition." MBA has proposed a $500,000 net-worth requirement. …CONTINUED
Shield against loss
All in all, the tighter credit policies, along with an increase in average FHA credit scores over the last year from 633 to 693, will help reduce losses, ensuring that claims on FHA loans don’t exceed premiums paid by borrowers, HUD said.
The U.S. House of Representatives this week passed legislation intended to help FHA combat fraud and lax underwriting by hiring additional staff and upgrading its technology.
The bill was a response to fears that increased demand for FHA-backed loans is taxing the FHA’s capabilities to oversee lenders, making the program more vulnerable to losses (see story).
With the collapse of secondary markets that funded subprime lending, the number of FHA-approved lenders grew more than fivefold in two years, from 692 at the end of September 2006 to 3,300 two years later.
FHA’s capital reserves currently exceed $30 billion, or more than 4.4 percent of insurance in force, HUD said today.
But an annual independent actuarial study that will be sent to Congress in November is expected to show the capital reserve ratio dropping below the congressionally mandated threshold of 2 percent, HUD said.
"To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new congressional action," Stevens said.
The former president and chief operating officer of real estate brokerage company Long & Foster Cos., Stevens also announced he plans to hire a chief risk officer — the first in the FHA’s 75-year history.
Charles McMillan, president of the National Association of Realtors, issued a statement supporting the changes, saying FHA is still solvent, has significant reserves, and remains an essential tool for consumers.
"While FHA’s capital reserve ratio has declined, that is not surprising for an agency dealing in housing finance in today’s market, and there is no sign that a taxpayer bailout will be required," McMillan said. "FHA stands in contrast to entities in the private sector, including Fannie Mae, Freddie Mac and many large banks that have needed tens of billions of dollars in federal funds."
Realtors have complained loudly that the Home Valuation Code of Conduct — rules governing appraisals conducted for loans backed by Fannie and Freddie — are derailing home sales. Many may be disappointed that FHA appears to essentially be adopting the same policies. …CONTINUED
But Bill Garber, director of government relations at the Appraisal Institute, said that there are important differences between the guidelines proposed by FHA and those in force at Fannie and Freddie.
The Appraisal Institute and other groups representing appraisers maintain that under a policy adopted more than a decade ago, FHA had limited how much appraisal management companies can charge on FHA assignments. That has meant that many experienced appraisers have been turning down FHA assignments from appraisal management firms (see story).
FHA’s new guidelines on appraisal independence corrects the 1997 policy, allowing separate fees be paid to appraisers and appraisal management companies, and for those fees to be determined by the market, Garber said.
Taken together with "geographic competency" requirements requiring appraisers to have experience in the markets they work in, the new FHA guidelines should address many of the complaints Realtors have had about Fannie and Freddie’s rules, Garber said — although some of those frustrations are attributable to price declines in markets hit by foreclosures.
"From an appraiser’s standpoint, the removal of a cap on appraiser fees was important," Garber said. "Fannie and Freddie chose not to address appraisal management companies in the Home Valuation Code of Conduct — it was a loophole. Frankly, I think Fannie and Freddie should adopt a similar policy" as FHA.
Letters to lenders
Other changes taking place Jan. 1 were spelled out in a series of letters to lenders.
Beginning Jan. 1, FHA will only consider appraisals valid for four months, compared to the current policy of six months for existing properties and up to 12 months for properties under construction, HUD said in another letter.
In another letter to lenders, HUD restated that lenders must transfer appraisals if requested when borrowers switch from one lender to another, and spelled out a new guideline allowing a second appraisal to be ordered under a limited set of circumstances.
The new procedures for streamlined refinancings include a requirement for an appraisal if a borrower wants to include closing costs to the transaction. The revisions bring documentation standards for streamlining refinance transactions in line with other FHA loan origination guidelines, HUD said, ensuring the borrower’s capacity to repay and prohibiting loan churning.
Requiring FHA-approved lenders to file audited annual financial statements "is a prudent safeguard that permits FHA to ensure that those entities with which it does business are adequately capitalized to meet potential needs," HUD said.
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