FHA Looks to Shore Up Finances with New MIP Changes

Federal Housing AdministrationrnCommissioner Carol Galante has just announced several significant changes tornFHA requirements, processes, and fees in an ongoing effort by the agency tornshore up its Mutual Mortgage Insurance Fund (MMI Fund.)  The first change – the consolidation of FHA’srnStandard Fixed-Rate Home Equity Conversion Mortgage (HECM) with its Saver FixedrnRate HECM – was officially announced today. rnHECM is commonly referred to as a reverse mortgage and is available onlyrnto homeowners over the age of 62.  </p

FHA said that the Fixed RaternStandard HECM pricing option currently represents a large majority of the loansrninsured through FHA’s HECM program and is responsible for placing significantrnstress on the MMI Fund.  To preserve the program as a financial option forrnaging homeowners FHA will make the HECM Fixed Rate Saver the only pricingrnoption available to borrowers who seek a fixed interest rate mortgage. rnUsing the Fixed Rate Saver for fixed rate mortgages will significantly lowerrnthe borrower’s upfront closing costs while permitting a smaller pay out thanrnthe HECM Fixed Rate Standard product, thereby reducing risks to the MutualrnMortgage Insurance Fund.  This change will be effective for FHA casernnumbers assigned on or after April 1, 2013.  </p

Other changes for which officialrnannouncements will be forthcoming over the next few days are:</p<ul class="unIndentedList"<liAn increase in annual mortgagerninsurance premiums (MIP) on most mortgages by 10 basis points or 0.10rnpercent. Premiums on jumbo mortgagesrnwith balances of $625,000 or larger will increase by 5 basis points or 0.05rnpercent. This will bring jumbo mortgagernpremiums up to the maximum premium authorized by Congress. These premiumrnincreases exclude certain streamline refinance transactions. </li<liFHA will reverse its existing policy</bof cancelling MIP on loans when the outstanding principal balances reached 78rnpercent of the original balance. BecausernFHA remains obligated to insure 100 percent of the outstanding loan balance forrnthe life of the loan, homeowners will now be required to maintain principalrnpayments over that period as well. FHA'srnOffice of Risk Management and Regulatory Affairs estimates that the MMI Fundrnhas foregone billions of dollars in premium revenue on mortgages endorsed fromrn2010 through 2012 because of this automatic cancellation policy.</li<liFHA will require lenders tornmanually underwrite loans for which borrowers have a decision credit scorernbelow 620 and a total debt-to-income (DTI) ratio greater than 43 percent.rnLenders will be required to document compensating factors that support thernunderwriting decision to approve loans where these parameters are exceeded,rnusing FHA manual underwriting and compensating factor guidelines.</li<liFHA will propose an increase in thernminimum down payments for jumbo loans from 3.5 to 5 percent. The proposal will be published in the Federal Register within the next fewrndays. </li<liFHA will step up its enforcementrnefforts for FHA-approved lenders with regard to aggressive marketing tornborrowers with previous foreclosures. Borrowersrnare currently able to access FHA-insured financing no sooner than three yearsrnafter they have experienced a foreclosure, but only if they have re-establishedrngood credit and qualify for an FHA loan in accordance with FHA’s fullyrndocumented underwriting requirements. It has come to FHA’s attention that a fewrnlenders are inappropriately advertising and soliciting borrowers with the falsernpretense that they can somehow “automatically” qualify for an FHA-insuredrnmortgage three years after their foreclosure. FHA will work with otherrnfederal agencies to address such false advertising by non-FHA-approvedrnentities. </li<liFinally, as discussed in its AnnualrnReport to Congress, FHA is also committed to structuring a new housingrncounseling initiative that would apply to a number of borrower classifications,rnincluding borrowers with previous foreclosures.</li</ul