On January 20th, FHA announced changes in its residential loan programs designed primarily to prevent the insolvency of the FHA insurance fund. The fund insures lenders against loss when FHA loans go bad. More than 14.4% of FHA loans were delinquent (payments more than 30 days late) at the end of the third quarter 2009, and another 3.3% were in the foreclosure process. In its most recent audit, FHA reported that its capital reserves had fallen below the congressionally-mandated two-percent of its loan portfolio, and some industry experts are concerned that the fund eventually will require a bailout from the Treasury.
The changes designed to head this off include:
– An increase in the upfront mortgage insurance fee (UFMIP) paid by borrowers at closing from 1.75% to 2.25% of the loan amount;
– An increase in the minimum down payment for borrowers with credit scores below 580 from 3.5% to 10%; and
– A decrease in the maximum amount a property seller is allowed to contribute to the buyer’s closing costs (seller concessions) from 6% to 3%.
The changes could have been worse. Most buyers add the UFMIP to their loan balances rather than pay it at closing, so the UFMIP increase is unlikely to discourage buyers. Very few lenders currently approve loans for borrowers with credit scores below 580, so the higher down payment standard will affect few potential buyers. Besides, a credit report can have a few hickeys, and the score still can exceed 580.
The most significant change is the decrease in the maximum seller concessions. The change makes FHA’s guidelines consistent with conventional loan guidelines. It is said the change was aimed at arresting the practice of sellers increasing their sales prices to absorb buyers’ closing costs.
FHA left the monthly mortgage insurance premium rate as it is – for now. FHA indicated it would like to increase the rate, but this requires congressional approval. An increase in this rate will reduce the number of qualified buyers because a higher premium raises the buyers’ debt ratio, which, of course, is one of the primary loan qualifying factors.