By NICK TIMIRAOS
The Federal Housing Administration is implementing more-stringent lending requirements and higher borrower fees to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.

The FHA said Wednesday it will raise insurance fees that borrowers must pay, and it will cap the amount of cash that sellers can contribute for closing costs. It will also require higher down payments for the borrowers with poor credit scores, below 580.

“These changes are overdue,” said David Stevens, the FHA commissioner, speaking to reporters. “FHA has a responsibility to be fiscally sound” and to provide homeowners with “financing that’s going to give them the ability to live in their home long term.”

The FHA, which backs as many as half of all new loans in certain housing markets, has come under fire for insuring home buyers who have put little or no money down as prices have plunged over the past three years. With its reserves falling sharply, the agency has been forced to walk a tightrope between protecting taxpayer dollars and helping to facilitate the housing recovery.

Josh Levin, a research analyst at Citigroup Inc., said the changes were less restrictive than expected and illustrated the “broader point that the federal government will likely find itself unable to extricate itself from support for the housing market.”

Mr. Stevens characterized the changes as “significant but not overwhelming,” and predicted that there would be “on the margin some curtailment of potential homeownership.”

Starting this summer, borrowers with credit scores below 580 will be required to make a minimum 10% down. While the FHA doesn’t have a credit-score cutoff, most lenders require a minimum 620 score. Fewer than 1% of FHA borrowers last year had credit scores below 580, according to LPS Applied Analytics.

The FHA opted not to raise minimum down payments for most borrowers, which are set at 3.5%. Some analysts had pushed for higher down payments and one bill in Congress would raise down payments to 5%.

Industry trade groups are strenuously opposed to such increases, and government officials, sensitive to concerns that tightening credit standards could hurt fragile housing markets, opted for less restrictive measures. “The FHA tightening arguably has no bite and is clearly a non-event,” said Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm, who called the changes a “major coup” for the housing industry.

The FHA, which currently insures more than one-third of all new home loans, doesn’t lend money to home buyers; instead, it insures lenders against default on loans that meet FHA criteria.

In exchange for FHA backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan. The FHA said Wednesday it will raise that fee to 2.25%, the second increase in the past two years. The change will go into effect this spring.

Also to boost its reserves, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually. If approved, that would allow the FHA to boost the annual fee while easing the upfront fee.

The FHA also will reduce the amount of money that sellers can kick in for closing costs to 3% of the sale price, down from the current level of 6%. The higher cap led to abuses where sellers “heavily marked up the purchase price” to compensate for their contribution, says Lou Barnes, a mortgage banker in Boulder, Colo.

The value of the FHA’s reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding and down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio and if the agency were to run short of cash to cover projected losses, it likely would have to ask Congress for money for the first time ever. If the larger insurance fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.

Mr. Stevens said he expected that the agency’s performance could see some “bumps and bruises in the months ahead” but said it was generally “headed in a positive direction.”

The FHA also announced a series of measures to boost its ability to police lenders that originate loans with FHA backing, and the agency will ask Congress for greater authority to take action against lenders who originate loans with high rates of default.

“Mortgage lenders will find the new rules painful but necessary,” said Howard Glaser, an industry consultant. He says the rules were past due given that “an ‘anything goes’ environment” had prevailed in recent years as former subprime brokers migrated into FHA-backed loans.

by DIANA GOLOBAY: Wednesday, January 20th, 2010, 9:41 am

Federal Housing Administration (FHA) commissioner David Stevens on Wednesday unveiled a sweeping set of policy changes designed to address risk and strengthen the financial standing of FHA’s insurance program, which guarantees FHA lenders against default-related losses.

“These changes are overdue,” Stevens said in a press call, adding the changes should be “significant but not overwhelming” to the lending industry.

The overhaul comes after an actuarial study reflected the FHA’s capital reserve ratio fell below the congressionally-mandated 2% minimum. Ahead of the study’s results, FHA implemented several policy changes, including measures to streamline refinances and establish appraisal guidelines, as well as a proposal to raise the net worth of FHA lenders to $2.5m.

Among the new changes announced Wednesday, FHA will increase the mortgage insurance premium by 50 bps to 2.25% – from 1.75% – effective in spring through a mortgagee letter.

FHA will also implement a new down payment system where borrowers only qualify for the 3.5% minimum down payment with a FICO score of at least 580. Borrowers with credit scores less than 580 will be required to put down at least 10%. Stevens would not comment on what percentage of FHA borrowers would fall under the latter category.

FHA will also reduce allowable seller concessions from 6% to 3% to make FHA’s program consistent with the marketplace and reduce the risk of price inflation at the time of purchase.

Stevens said FHA will seek to increase its enforcement of standards on FHA lenders by first publicly reporting lender performance rankings as of February 1st. This will “hold lenders more accountable” and keep them informed of where behavioral expectations should be within their peer group.

FHA will be pursuing legislative authority to increase enforcement through additional amendment to the National Housing Act that would apply indemnification provisions to all direct-endorsement lenders and would essentially require lenders to assume liability for all loans they underwrite.

Stevens said FHA is also pursuing legislative authority that would permit it to establish separate “areas” for purposes of lender review and termination under the credit watch initiative. This initiative, he said, would let FHA withdraw originating and underwriting approval from a lender nationwide based on the performance of regional branches.

The changes reflect what Stevens stressed are the priorities at the FHA – to get the capital reserve headed back to the minimum requirement, to keep from disrupting the housing finance industry and to support under-served first time homebuyers.

David Stevens bought his first home almost 25 years ago, paying just 3% down with a loan backed by the Federal Housing Administration. “I had no money in the bank,” he says. “If it weren’t for the FHA, I wouldn’t have gotten that home.”

Now, as FHA commissioner, Mr. Stevens has to decide how many others to let through that door. Souring FHA-insured mortgages are threatening the agency’s finances. Congress is pressuring him to tighten the easy-money standards that once helped people like him, and he is expected to announce revisions as early as this week.

But raising the credit bar could have a dangerous side effect. In many of the nation’s hardest-hit housing markets, the FHA backs around half of all new home loans. If the agency pulls back too quickly, the nascent housing recovery could fizzle, endangering the economy.

The dilemma puts the 52-year-old former mortgage banker squarely in the middle of the debate over how much the government should do to prop up the housing market, and how much risk taxpayers should take on to do it.

“How big a role do we need to play to keep the housing system functioning?” says Mr. Stevens, referring to the FHA. “Overcorrecting in either direction would be a terrible thing to do right now.”

Mr. Stevens is finalizing possible revisions to credit standards. Options include raising the minimum down payment, establishing a minimum credit score, increasing the amount that borrowers have to pay for mortgage insurance, and reducing the amount of money sellers can kick in for closing costs.

The FHA, created in 1934 to heal the U.S. housing market during the Great Depression, traditionally has helped first-time home buyers and underserved segments of the market. It doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria, collecting fees for that backing. For decades, thanks to a stable housing market, it turned a profit for taxpayers.

When the housing market was booming, subprime lenders drew away many of the borrowers who traditionally used FHA-backed loans by offering even more favorable terms. Unlike the FHA, subprime lenders didn’t require borrowers to document their incomes. The FHA saw its share of the mortgage market fall to 2% in 2006.

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“We are absolutely moving forward on RESPA,” HUD assistant secretary David Stevens told MortgageWire. “Jan. 1 is the implementation date.”

The Department of Housing and Urban Department is going ahead with the implementation of a RESPA disclosure rule despite pleas by some industry groups to delay the effective date, according to a top HUD official.

Some industry groups are complaining that the new Real Estate Settlement Procedures Act rule is complex and HUD is still providing guidance on implementation issues. The RESPA rule requires lenders and mortgage brokers to disclose their fees upfront on a standardized good faith estimate. The originator’s fees cannot be increased before closing. The layout of the GFE and the revised HUD-1 settlement sheet also provides a clearer disclosure of the closing costs and how much the consumer will pay.

“I think the new disclosures are going to have a very positive impact on consumers,” Mr. Stevens said.

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Almost two months ago monies were being spent in the stimulus package that went to things like tunnels for turtles, guard rails for dried lakes, rehabs for airports that saw very few customers, repairs to train stations that had been closed for decades and much more, but we were appalled that Congress was considering Bills which would make our seniors carry the cost of the HUD reverse mortgage program.

We felt that if Billions and Trillions of dollars could be used for these and other projects like skate board parks, hundred million dollar court house renovations, scientific grants for laser beams and wetlands preservation, that surely Congress could find the money to help our seniors continue to utilize the HUD Home Equity Conversion Mortgage (HECM or “Heck-um”) program to continue to stay in their homes. Unfortunately, it looks like we were wrong!

Just yesterday a news item came out that we were going to send $36.7Billion in foreign aid to wealthy countries and countries who don’t like us. That’s right, we can find almost $40Billion for countries who are already wealthy or would like to see us fall into the ocean, but we don’t have the money to fund a program that helps our senior homeowners stay in their homes without cutting the benefit amount to those senior homeowners. Our mothers, fathers, grandmothers and grandfathers aren’t as important as the money we will send to North Korea, Cuba, Venezuela, Libya, Bolivia, Russia and others.

It seems that not only do we have money for all these pet projects, but we have money for healthcare reform that by all accounts may further cut benefits to seniors in the form of cuts to Medicare and Medicaid. And just today HUD announced with Mortgagee Letter 2009-34 that Principal Limit Factors are being changed effective October 1, 2009 to “assist with the viability of the program”.

It seems that the HECM program was never intended to operate with a credit subsidy as was explained by the Commissioner, David Stevens, in a call to the Reverse Mortgage Lenders Association (NRMLA). He remained open to re-engineering the mortgage insurance premiums or making other changes but indicated that there was nothing HUD could do since the program needed to operate without need of a subsidy.

According to the notice issued by the NRMLA yesterday, several of the larger reverse mortgage lenders did an analysis on the portfolios of loans they have done year to date and that 10% reduction of benefits under the program (this is the amount HUD intends to lower the benefits) would have left approximately 21% of all the borrowers with too little proceeds to pay off the existing loans on their homes. In other words, more than one fifth of all reverse mortgages done would not have been able to be closed unless the borrowers had additional cash they could bring in to closing!

This means that all the borrowers who barely paid off their liens to keep their homes during these extremely tough financial times would be forced to move or even worse, if they were currently delinquent on their home mortgages may have been foreclosed upon if they didn’t have the extra money to cover the reduced benefit amount.

We did more than two dozen loans at this company alone year to date for senior homeowners who were behind on their current mortgage due to the financial climate who would have not have been able to close and would not have been able to keep their homes under the proposed changes. At least a dozen were currently in foreclosure and definitely would have lost their homes with these changes.

Seniors already pay a large portion of this program since the single largest fee in any reverse mortgage transaction is typically the HUD mortgage insurance at closing. On the largest of transactions, this is over $12,500 per borrower to HUD. Then all borrowers also pay one half of 1% for monthly mortgage insurance on their loans. I have no way of knowing what claims have been paid due to the mortgage market crash, but surely the HECM loans are no worse off than the forward or regular loans that HUD has insured through FHA.

The office of Management and Budget (OMB) came up with the numbers to determine the projected shortfall in the program and I for one do not know how they were derived and maybe would take exception with their figures. But to make our seniors pay yet again while we cover the billions and trillions in costs for superfluous programs and projects while our seniors need our help and support is criminal! This is just one more cut to the senior community while we spend for pet projects and for things few can justify and yes, seems we even the found the money to give Congress a raise.

I ask everyone, even if you are not a senior yourself, to contact your representative at http://www.usa.gov/Contact/Elected.shtml and tell them that you strongly urge them to find a way to fully fund the HUD HECM program and instruct HUD to revert back to the existing benefits so that our seniors do not have to foot the bill by way of reduced benefits.

It’s amazing that HUD or Congress would even consider a change at this time when our seniors need their help more than ever and I hope that the Congress hears from a lot of concerned citizens before it’s too late. How about if we renovate one less useless airport, leave out a few guardrails for dried lakes, build one or two less skateboard parks or just send a little less money to the nations who are already wealthy or want to do us badly anyway in the name of our parents and grandparents so that they can stay in their homes? I for one don’t think that’s asking too much.

To comment on this article visit http://www.allrmc.com/articles/HUD_-_Congress_Hack_Reverse_Mortgage_Limits.php