The Federal Housing Administration has committed to several changes to FHA mortgage programs that, while less drastic than measures proposed by Senate Republicans, will limit the ability of some borrowers with low credit scores to qualify for loans, and raise minimum down payment requirements and premiums for borrowers taking out mortgages larger than $625,000.
The changes are designed to shore up FHA’s reserves after the agency reported a $16.3 billion deficit in a report to Congress last month, raising the specter that FHA will require a taxpayer bailout next year for the first time in its 78-year history.
Sen. Bob Corker, a Tennessee Republican, announced today that the FHA had committed to change and that in return, he will support Acting FHA Commissioner Carol J. Galante’s nomination to be FHA commissioner.
Corker released a letter from Galante, who promised FHA would "move on" several policy changes by Jan. 31, 2013:
- Increase underwriting criteria for borrowers with FICO credit scores between 580 and 620 by establishing a maximum debt-to-income ratio.
- Increase the down payment requirement and the insurance pricing for loans between $625,000 and $729,000 to protect FHA against loss on high balance loans that are outside Fannie and Freddie conforming loan limits and scale back the government’s footprint in the housing market.
- Crack down on lenders that advertise under the false pretense that borrowers can "automatically" qualify for an FHA-insured loan three years after a foreclosure. Borrowers who have experienced a foreclosure must have re-established good credit and meet underwriting criteria, including the policy change outlined above for borrowers with credit scores under 620. FHA also committed to analyzing whether a foreclosure due to a one-time event, such as a job loss, resulted in a different or better performance than other reasons for foreclosure.
- Place a moratorium on the full drawdown reverse mortgage program, the Standard Fixed Rate HECM, to assess its viability after $2.8 billion in losses.
In her letter to Corker, Galante said FHA is finalizing a letter to lenders that will require borrowers with FICO scores below 620 to have a total debt-to-income ratio of no more than 43 percent to be eligible for processing through FHA’s automated underwriting system, TOTAL Scorecard. Borrowers with DTIs exceeding 43 percent will have to be processed manually, with lenders documenting compensating factors such as a larger down payment or a higher level of reserves.
Galante said FHA will raise the minimum down payment on loans between $625,500 to $729,000 from 3.5 percent to 5 percent. Since June, FHA has been pricing mortgage insurance premiums for loans in that range at 150 basis points, instead of 125 basis points. Another premium increase announced in November will raise the premiums to 155 basis points — the maximum currently allowed by law.
In normal housing markets, FHA is only allowed to guarantee loans of up to $271,050. But in high-cost markets, FHA is permitted to insure loans of up to 125 percent of the median home price, up to a limit of $729,750.
Congress boosted loan limits for FHA, Fannie Mae and Freddie Mac in 2008, after the secondary market for "jumbo loans" not backed by the government collapsed. Before the ceilings were implemented, Fannie and Freddie’s "conforming loan limit" was $417,000 in all but a few high-cost markets.
While Congress allowed Fannie and Freddie’s loan limits to slip back to $625,500 last year, it restored FHA’s ability to insure loans of up to $729,750 in high cost markets through 2013.
That means FHA is the only option for government-backed loans of $625,500 or greater. Borrowers can still obtain "jumbo loans," but can expect to pay higher rates because lenders must keep them on their books.
The combination of higher down payment requirements and increased mortgage insurance premiums is aimed at scaling back the FHA’s market share of those loans.
Galante said she would "move on these additional actions by January 31, 2013" but did not give an exact date for when the changes would take effect. An FHA spokesman confirmed the letter’s authenticity, but said no further information was available.
Galante said she had confirmed that the Obama Administration will support these new policies.
Corker, a member of the Senate Banking, Housing and Urban Affairs Committee, said that as a result of Galante’s commitment to these FHA reforms, he will drop his opposition to her bid to become FHA commissioner.
"While this is only a first step, I am encouraged that Acting Commissioner Galante has committed to structural reforms that we both believe put FHA in a much stronger position. Given the reforms she is committed to, I believe that having an accountable commissioner with her resolve and expertise will be in the best interest of the taxpayer," Corker said in a statement.
Last week, Corker announced he had sponsored an amendment to FHA legislation calling for a minimum credit score of 620 for all borrowers, a two-year shutdown on the entire reverse mortgage program, a maximum loan limit lowered to $625,000, and 20 percent down payments for mortgage applicants who experienced a foreclosure during the preceding seven years.