FHA to Raise FICO Requirements, Reduce Seller Concessions, Increase Premiums and Downpayment

The Federal Housing Administration (FHA) is not, as some have claimed “thernnext subprime,” according to remarks prepared for presentation to congress thisrnmorning by Housing and Urban Development Secretary Shaun Donovan.

Secretary Donovan told members of the House Committee on FinancialrnServices that FHA, in spite of actuarial reports that its secondary reservernlevel has fallen below the required two percent to 0.53 percent of its total insurance-in-force,rnis capable of withstanding the current economic downturn.  The actuary concluded Donovan said that FHA'srnreserves will remain positive “under all but highly severe economic scenarios.”

He said that HUD had learned fromrnrecent history, “that the market is fragile, and we have to plan for thernunexpected.  That uncertainty is complicated by an organization werninherited that, to be honest, was simply not properly managing or monitoringrnits risk.  Credit and risk controls werernantiquated.  Enforcement was weak.  And our personnel resources andrnIT systems were inadequate.

“Little of this may have been obvious when FHA's market share was 3 percent asrnrecently as 2006.  But when our mortgage markets collapsed last fall, andrnhomebuyers increasingly turned to the FHA for help, the potential consequencesrnof these lapses in risk management became very clear.”

His department, he said, is in the process of drafting new policies tornaddress the quality of FHA's current portfolio, improve the performance ofrnfuture loans, and restore the capital reserve above its mandated levels. 

The agency is looking at several measures to improve the quality of itsrnportfolio going forward.  It plans tornreduce the maximum permissible seller concession from 6 percent to 3 percentbecause the current level exposes the FHA to excessive risk by creatingrnincentives to inflate appraised values. rnThe change, he said, will bring FHA into line with industry norms and evenrnfurther reductions may be considered.

The minimum borrower FICO score will be raised although the final numberrnhas not yet been determined.  The agencyrnis studying whether new FICO minimums should be accompanied by changes in otherrnunderwriting criteria for lower down payment loans.

The up-front cash that a borrowerrnwill be required to bring to the table for an FHA-backed loan will also bernincreased to make sure that borrowers have “skin in the game.”  The exact way this will be accomplished isrnstill under study.

These proposed changes, Donovanrnsaid, only require administrative decisions on the part of HUD, however, Congressrnwill be asked to pass legislation to increase premiums.  The current up-front premium of 1.75 percentrnis below the statutory cap of 3 percent but the annual premium is at thernmaximum.  Raising premiums, he said, isrnthe most effective means of raising capital for the reserve fund with the leastrnimpact per borrower.
 
Donovan said that more than 71rnpercent of the future losses the FHA is anticipating will come from loansrnalready on its books, so, as MortgageNewsDaily reported on Monday, the agency isrntaking steps to enforce lender accountability. rnDonovan said that, in addition to holding lenders responsible for theirrnorigination quality and compliance and increasing reviews of that compliance,rnlenders will be required to indemnify the FHA for losses resulting from their failuresrnto meet FHA requirements and will be sanctioned nationally for any improperrnactivities rather than through the FHA's current policy of sanctioningrnindividual branches.

The secretary reported that the anticipated changes are merely thernlatest in a series of improvements FHA has made to shore up its lendingrnactivities. 

• In 2008, Congress put an end to the practices that led to the mostrntroubled loans in FHA's portfolio – so-called “Seller-Financed DownpaymentrnAssistance” loans. Without these loans, Donovan said, the actuaryrnreported that secondary reserves would have remained above the two percentrnthreshold. “This year, we've takenrnseveral additional steps. We've steeply increased enforcement efforts,rnhaving suspended seven lenders, including Taylor, Bean and Whitaker andrnwithdrawn FHA-approval for 270 others, including Lend America just this week.”

• Credit and risk controls have been tightened. Requirements for the Streamlined Refinancernprogram have been toughened with several improvements to the appraisal processrnand proposing a rule to increase net worth requirements for all FHArnlenders. The latter has just entered the notice and comment period.
• The agency has hired a permanent Chief Risk Officer to provide a comprehensivernand thorough risk assessment and ensure that the assumptions going into thernagency's modeling reflect the most current economic conditions.
• FHA is working to increase staffing and technical capacity and upgradernour technology systems and delivered FHA's first comprehensive technologyrntransformation plan to Congress in September.

The Secretary detailed the active role that FHA isrntaking in the current housing market, insuring almost 30 percent of purchasesrnand 20 percent of refinances in the housing market, and financing the majorityrnof minority home purchases.  But, hernsaid, “as important as the FHA is at this moment, I want to emphasize that the elevatedrnrole it is playing is temporary – a bridge to economic recovery helping tornensure that mortgage finance remains available until private capital returns.”

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