12/10: Matt Kellam, Help-U-Sell Keystone Realty, Chambersburg, PA, was on our Broker Roundtable teleconference yesterday and raised a red flag of warning. He said changes in FHA guidelines were in the works and they could greatly impact the number of borrowers who might qualify for FHA insured mortgages.
I spent this afternoon trying to track down the truth. I Googled everything and talked at length with a Bank of America MLO — a fellow who really knows his stuff — and didn’t learn anything much beyond new Condominium guidelines (which will basically be favorable to our industry) and something called ‘The FHA Taxpayer Protection Act of 2009’ that’s stuck in Committee in the House.
But then our Communication Resource, Tami Patzer, sent me a copy of Secretary Shaun Donovan’s remarks to the Senate last week. You can read the full piece by clicking here, but this is the section that concerns me the most:
. . . . we are committed to a series of additional steps to increase the quality of our business going forward.
An initial measure is to reduce the maximum permissible seller concession from its current 6 percent level to 3 percent, which is in line with industry norms, and we will continue to consider additional reductions. The current level exposes the FHA to excess risk by creating incentives to inflate appraised value.
Secondly, to protect the fund from the riskiest borrowers, we will for the time being also raise the minimum FICO score for new FHA borrowers.
We are currently analyzing what this floor should be, including the relationship between FICO scores and downpayments to determine whether we should increase FICO minimums in combination with changes to other underwriting criteria for lower downpayment loans.
Third, we have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan – to make sure that FHA borrowers have more “skin in the game” and a stronger equity position in their loans. There are several ways to accomplish this, and so we are currently analyzing various options to determine which is the most effective and consistent with our mission.
Finally, we are examining our mortgage insurance premium structure to determine whether an increase is needed and, if so, whether it should be the up-front premium, the annual premium or both. Our current up-front premium of 1.75 percent is below the statutory cap of 3 percent, while the annual premium is currently at the statutory maximum. To protect against future uncertainty in market conditions, we are requesting authority from Congress to raise annual premiums, as this is one of the most effective means of raising capital for the fund with the least impact per borrower.
In the opening section, he says they are ‘committed to’ the following changes. I normally take that to mean they are considering them. However, as you read further, it seems clear that these changes have already been mandated.
If this, in fact, is the case, the impact on FHA buyers — wh0 are fueling the real estate recovery — will be big. It saddens me to see this on the heels of the extension of the home buyer tax credit and I can only hope that the language is not what it seems. I will continue to search for confirmation (and hope for the opposite) — and if you hear anything, please let me know.
Update: 12/10 – Inman News says the changes will be announced to lenders in January and likely won’t go into effect for 60 days. Usually, new guidelines don’t affect loans already in process, so it’s likely anything pending before March will fall under the current rules.