Ever since home mortgage lenders tightened their standards, home buyers without much money for a down payment have turned to the Federal Housing Administration (FHA), which was far more lenient.
Now the FHA, beset by a rising tide of delinquencies and failing reserves, is cracking down.
On Wednesday, the FHA announced it was raising the mortgage premiums paid upfront by borrowers, raising credit scores and in some cases down payments, and reducing the concessions sellers can make to buyers.
The changes, which had been expected for months, are intended to ultimately increase FHA’s depleted capital reserves. They also mean some lower-income borrowers may not be able to afford to buy a home until they save more money. However, many housing analysts said the changes are modest enough that they won’t have a significant impact on borrowing by the minority community.
“The burden to the individual borrower is modest and should ensure, overall, that borrowers have access to responsible credit,” wrote David Berenbaum, chief program officer of the Washington-based National Community Reinvestment Coalition, which lobbies for financial services for working class communities.
The major changes are:
• Mortgage insurance premiums will increase by half of a percentage point to 2.25 percent. At the same time, FHA will seek Congressional authority to increase the maximum annual premium so the increased costs can be spread over the life of the loan. This will help shift the upfront cost to the consumer into a more manageable annual fee.
• New borrowers will have to have a minimum FICO credit score of 580 to qualify for FHA’s 3.5 percent down payment program. Before the change, the minimum score was 500. Borrowers with less than a 500 score will be required to put down 10 percent of the loan.
• Seller concessions such as picking up closing costs will be reduced from 6 percent to 3 percent. This may mean buyers will either have to negotiate a lower price for a house or have more cash to pay closing fees.
The FHA changes come at a time when private demand for mortgages is still down from a year ago. Reporting for the week ending Jan. 15, the Mortgage Bankers Association (MBA) said Wednesday that loan application volume was down 52.3 percent compared to the same week a year ago. However, it was up 10.4 percent from the prior week on a non-seasonally adjusted basis.
While loan demand is down from a year ago, FHA guaranteed loans as a share of the market have soared from 3.77 percent four years ago to more than 30 percent currently. Meanwhile, FHA cash reserves have fallen to 0.5 percent of outstanding loans compared with the 2 percent required by Congress.
On Wednesday, FHA Commissioner David Stevens said the agency would project any improvements in its balance sheet resulting from the premium increases when it presents its budget request in a few weeks.
Community groups seem to agree that it’s important that FHA become stronger. “Everyone wants a strong FHA,” says David Fink, policy and communications director of Partnership for Strong Communities, a Hartford, Conn., group that has testified before Congress on housing issues. “And everyone wants to make sure people give loans to people who can afford them. If we made mistakes in the past, it was that we had credit that was too loose.”
But as loan standards are tightened, it’s important to have affordable rental properties for low-income earners, Mr. Fink says.
“We just don’t have enough affordable multifamily rental properties,” he says. “We need the peanut butter with the jelly.”
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