The Federal Housing Administration won’t raise the 3.5 percent minimum downpayment requirement for mortgages it guarantees as long as borrowers have FICO scores of 580 or better.

Beginning early this summer, however, borrowers with credit scores below 580 will be required to make downpayments of at least 10 percent in order to participate in FHA’s mortgage insurance program.

This spring, the Obama administration also plans to raise the upfront mortgage insurance premiums paid by all FHA borrowers to 2.25 percent, up from 1.75 percent now.

The increase — some of which may later be shifted to annual premium payments — will help build FHA capital reserves back to statutory minimums and bring back private lending, FHA Commissioner David Stevens said today.

Stevens also said enforcement of FHA lenders will be stepped up, and that allowable seller concessions will be reduced from 6 percent to 3 percent early this summer. The current 6 percent level exposes FHA to excess risk by creating incentives to inflate appraised values, he said.

Stevens said the planned changes — previously outlined by Housing Secretary Shaun Donovan in December — strike the right balance between "managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery."

The National Association of Realtors has opposed to legislation that would increase FHA’s minimum downpayment requirement to 5 percent, saying it would exclude many borrowers without bolstering FHA reserves.

There has been some concern that any tightening of FHA underwriting standards or increase in fees would come around the same time as two other events that could also have an impact on home sales.

The Federal Reserve will wind down a $1.25 trillion program at the end of March that’s helped keep mortgage rates low, and the recently expanded homebuyer tax credit expires for buyers not under contract by April 30 and closing by June 30 (see story).

Real estate industry and consumer groups generally welcomed the changes announced today as an alternative to an across-the-board increase in FHA minimum downpayment requirements. …CONTINUED

NAR Chief Economist Lawrence Yun said he does not expect the "modest tightening" announced today will stall the housing market recovery, given that interest rates remain near historic lows and that the homebuyer tax credit will remain in effect during the first half of the year.

"Any tightening will knock some would-be buyers out of the potential pool," Yun said. "But at the same time, any lax underwriting or FHA insolvency can have more significant future negative ramifications for the housing market."

Mortgage Bankers Association Chairman Robert Story said the changes were necessary given the stress the downturn has put on the FHA program, although many lenders have already tightened their standards.

Story said the MBA supports FHA’s efforts to "root out" lenders who "pose undue risk to the program," but called for "fair and thorough investigations and appropriate due process" for those singled out for enforcement action.

The National Community Reinvestment Coalition, which promotes access to credit in underserved communities, said the changes represented an "attempt to navigate a prudent course" without impacting minority borrowers.

The burden to individual borrowers is "modest and should ensure, overall, that borrowers have access to responsible credit," NCRC’s David Berenbaum said in a press release.

"While some less creditworthy borrowers will need higher downpayments, 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."

With private mortgage insurers tightening their standards, FHA insured almost 30 percent of all purchase loans and 20 percent of total refinances during the 12 months ending Sept. 30. First-time homebuyers accounted for nearly 80 percent of FHA-backed purchase loans in the second quarter of 2009, and almost half of first-time buyers relied on FHA-insured loans.

The changes to FHA underwriting standards were announced in the wake of an actuarial study that found that even as FHA’s market share has grown, its capital reserve ratio had fallen below a 2 percent minimum established by Congress.

The study showed that premiums from insurance policies written in coming years should be sufficient to cover losses even in the event of a second severe recession. …CONTINUED

But if the nation enters a protracted economic recession where mortgage rates fall to 2 percent and stay there for three years, the study predicted that FHA could require a taxpayer bailout for the first time in its history (see story).

In December, Donovan said the Obama administration had determined it had to increase the amount of upfront cash FHA borrowers bring to the closing table. But he said there were several ways to accomplish that goal.

FHA borrowers currently pay an upfront mortgage insurance premium of 1.75 percent, plus annual premiums of 0.5 percent on loans with loan-to-value ratios of up to 95 percent. Annual premiums on loans with higher LTVs are 0.55 percent.

HUD could have raised the upfront mortgage insurance premium to as high as 3 percent without approval from lawmakers, instead of the 2.25 percent announced today.

Once the increase takes effect, a borrower taking out a $200,000 loan will need pay an upfront premium of about $4,500, an increase of $1,000.

But annual premiums are already at their statutory limits, so HUD will seek authority from Congress to raise those payments.

If Congress grants it that authority, some of the increase in the upfront premium slated to take effect this spring could be shifted to annual premiums, Stevens said.

Shifting some of the increase in FHA premiums from the upfront to the annual mortgage insurance premium will reduce the impact to borrowers, he said, since annual premiums are paid over the life of the loan instead of at the time of closing.

In 2008, FHA briefly implemented a risk-based pricing system in which borrowers with good credit paid an upfront premium of as little as 1.25 percent, while borrowers considered "higher risk" paid 2.25 percent upfront.

Some lawmakers questioned the fairness of that system, and the Housing and Economic Recovery Act of 2008 suspended implementation of risk-based pricing.

The Bush administration then increased the upfront mortgage insurance premium to 1.75 percent for all borrowers, up from 1.5 percent before the introduction of risk-based pricing (see story).


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