The Federal Housing Administration will issue a series of changes to FHA mortgage programs this week designed to bolster the agency’s capital reserves in the hopes of avoiding a taxpayer bailout.

The changes 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 $625,500. 

The agency reported a $16.3 billion deficit in a report to Congress in November, raising the specter that FHA will require a taxpayer bailout next year for the first time in its 78-year history.

The U.S. Department of Housing and Urban Development (HUD), of which FHA is a part, noted the changes in an announcement today:

  • As of April 1, 2013, FHA’s full drawdown reverse mortgage program, the Standard Fixed Rate HECM, will no longer be available to borrowers who seek a fixed interest rate mortgage. Such borrowers will only have access to the HECM Fixed Rate Saver, which "will significantly lower the borrower’s upfront closing costs while permitting a smaller pay out than the HECM Fixed Rate Standard product, thereby reducing risks to the (FHA’s) Mutual Mortgage Insurance Fund," the agency said. The vast majority of HECM borrowers currently choose the Standard option.
  • FHA will raise the annual mortgage insurance premium paid by borrowers on most new FHA loans by 10 basis points, or 0.1 percent, which the agency expects will add $13 a month to the average borrower’s monthly payments. FHA will also increase premiums on jumbo mortgages (those $625,500 or bigger) by 5 basis points or 0.05 percent, to 155 basis points — the maximum currently allowed by law. Certain streamline refinance transactions will be excluded from the premium increases, the agency said.
  • FHA will reverse a policy that automatically canceled required premium payments after loans reached 78 percent of their original value. Most FHA borrowers will now have to continue paying annual premiums based on the unpaid principal balance for the life of their mortgage loan. The agency estimates it lost billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this cancellation policy.
  • Borrowers with FICO credit scores below 620 and a total debt-to-income ratio of more than 43 percent will not be eligible for processing through FHA’s automated underwriting system, TOTAL Scorecard. Such will have to be processed manually, with lenders documenting compensating factors such as a larger down payment or a higher level of reserves.
  • FHA will propose an increased minimum down payment on loans between $625,500 to $729,000 to 5 percent from 3.5 percent. "This change, coupled with the statutory maximum premiums charged for these loans, will help protect FHA and further facilitate its efforts to encourage higher levels of private market participation in the housing finance market," the agency said.
  • FHA will 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 is also committed to a new housing counseling initiative that would apply to a number of borrower classifications, including borrowers with previous foreclosures, the agency said.

The changes will fulfill the commitments FHA Commissioner Carol Galante made in December in a letter to Sen. Bob Corker, a Tennessee Republican and a member of the Senate Banking, Housing and Urban Affairs Committee, who in return for the commitments agreed to drop his opposition to Galante’s nomination to be FHA commissioner. The U.S. Senate confirmed Galante to the post on Dec. 30. 

"These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs," Galante said in a statement.

"In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers."

The reverse mortgage consolidation was announced today. HUD will provide further details on the remaining changes through announcements in the next several days. 

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