FHA Increases Upfront MIP Fee; Raises Credit Score Requirement; Reduces Seller Concessions

As expected….

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Announced FHA Policy Changes:

Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending

• The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
• If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
• This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
• The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.

Update the combination of FICO scores and down payments for new borrowers.

• New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
• This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
• This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.

Reduce allowable seller concessions from 6% to 3%

• The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
• This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

Increase enforcement on FHA lenders

•  Publicly report lender performance rankings to complementrncurrently available Neighborhood Watch data – Will be available on thernHUD website on February 1.

          o This is an operational change to make information morernuser-friendly and hold lenders more accountable; it does not requirernnew regulatory action as Neighborhood Watch data is currently publicly  rnavailable.

• Enhance monitoring of lender performance and compliance with FHA guidelines and standards.

          o Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
          o This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.

•  Implement statutory authority through regulation of section 256rnof the National Housing Act to enforce indemnification provisions forrnlenders using delegated insuring process

          o Specifications of this change will be posted in March, andrnafter a notice and comment period, would go into effect in earlyrnsummer.

• HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:

          o Amendment of section 256 of the National Housing Act tornapply indemnification provisions to all Direct Endorsement lenders.Thisrnwould require all approved mortgagees to assume liability for all ofrnthe loans that they originate and underwrite
          o Legislative authority permitting HUD maximum flexibility tornestablish separate “areas” for purposes of review and termination underrnthe Credit Watch initiative. This would provide authority to withdrawrnoriginating and underwriting approval for a lender nationwide on thernbasis of the performance of its regional branches

In addition to the changes proposed today, the FHA is continuing tornreview its overall response to housing market conditions, andrncontinuing to evaluate its mortgage insurance underwriting standardsrnand its measures to help distressed and underwater borrowers throughrnFHA/HAMP and other FHA initiatives going forward.

UPDATE TO FOLLOW

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