FHA has beenrnscrambling to strengthen its financial situation since an audit late in 2009 showedrnthat the capital ratio of its Mutual Mortgage Insurance Fund (MMIF) had fallenrnbelow its statutorily mandated threshold. rnIn recent months the Administration has raised premiums on its FHArninsurance, prohibited seller-financed down payment assistance, stepped up enforcementrnof its regulations, tightened appraisal rules, banned several lenders fromrnwriting FHA guaranteed loans and brought suit against others. READ MORE</p

In announcing the current revisions FHA saidrnit is concerned with the issue of layering risk.  The chance of default is compounded in loansrnwhere there are low credit scores, high loan to value ratios, highrndebt-to-income ratios, and low or zero cash reserves associated with a loan.</p

Under thernproposed requirements for credit and down payments, new borrowers will bernrequired to have a minimum FICO score of 580 to qualify for the popular 3.5rnpercent down payment program.  Borrowersrnwith lower scores will have to put up at least 10 percent down to qualify forrnFHA guaranteed financing and those with scores below 500 will not be eligiblernfor FHA guarantees of any type. </p

FHA saidrnthat few borrowers will be affected by the change as lenders themselves have primarilyrnused higher qualifying scores.  In 2009, approximatelyrn93 percent of FHA loans had loan values above 90 percent, and less than 2rnpercent of those borrowers had credit scores below the proposed credit score thresholdrnof 580.  Those borrowers in the higher LTV/lowerrnFICO category, however, have proven to be unacceptable risks.  Borrowers with LTVs over 90 percent andrnscores under 580 have a delinquency rate of  30 percent while those in with LTVs up to 90rnpercent and with scores under 500 have a rate of 35 percent.  Loans given to borrowers above the proposed creditrnscore floors have a rate of 7.63 percent. rnAmong the comments sought by FHA regarding the above changes isrnsuggestions for acceptable score ranges for lenders using scoring models otherrnthan FICO</p

FHA isrnconsidering providing a temporary exception to the credit/down payment changesrnin the case of a borrower who is refinancing to reduce indebtedness underrnearlier changes announced by FHA. </p

FHA has requiredrnthat seller concessions to borrowers in excess of six percent be treated as anrninducement to purchase and that the FHA mortgage amount be reducedrnaccordingly.  The new rule would reducernthat allowed concession to 3 percent, with the permitted mortgage amount reducedrndollar for dollar where concessions are given above that level.  FHA said that this will bring the rule inrnline with the guidelines of most conventional lenders.  FHA said it has found that borrowers who hadrnbeen allowed to take concessions above 3 percent had a significantly higherrnrisk of losing their homes.  For example,rnloans written in 2008 with no concessions had a claim rate against the FHArnguarantee of 1 percent; seller concessions up to 3 percent had a rate of 1.2rnpercent while those loans with concessions above 3 percent had a claim rate ofrn1.7 percent.</p

The thirdrnproposed change outlines compensating factors which can be used by lenders tornqualify loans that, largely because of a limited or nontraditional creditrnhistory on the part of the borrower, may need to be manually underwritten.  Under the change, lenders will be required tornconsider those factors which are the best predictive indicators of loanrnperformance.</p

Acceptable compensating factorsrninclude:</p<ul class="unIndentedList"<liArndocumented significant decrease or minimal change in housing expense coupledrnwith a documented 12 month housing payment record with no more than one 30-dayrnlate payment.</li<liDocumentedrnsignificant additional income that is not considered effective income.</li<liDocumentedrncash reserves of at least 3 monthly mortgage payments including principal,rninterest, taxes, and insurance.</li<liSpecialrn"stretch" debt ratio provisions for Energy Efficient Mortgages. </li</ul

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