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.

HUD Takes Action to Speed Resale of Foreclosed Properties to New Owners
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RISMEDIA, January 19, 2010—In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan recently announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration’s commitment to addressing foreclosure. Secretary Donovan recently announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes.

“As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential home buyers,” said Donovan. “FHA has an unprecedented opportunity to fulfill its mission by helping many home buyers find affordable housing while contributing to neighborhood stabilization.”

With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.

“This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed,” Donovan said.

In today’s market, FHA research finds that acquiring, rehabilitating and reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

“FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties,” said FHA Commissioner David H. Stevens. “This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity.”

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of “flipping,” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

-All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
-In cases in which the sales price of the property is 20% or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
-The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

For more information, visit www.hud.gov.

Read more: http://rismedia.com/2010-01-18/hud-takes-action-to-speed-resale-of-foreclosed-properties-to-new-owners/#ixzz0d65JBrMX

A measure to help bring stability to home values and accelerate sale of vacant properties

In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration commitment to addressing foreclosure. Just yesterday, Secretary Donovan announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes.

“As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers,” said Donovan. “FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization.”

With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.

“This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed,” Donovan said.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

“FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties,” said FHA Commissioner David H. Stevens. “This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity.”

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
• The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD’s website.

Source: Lemar Wooley (HUD.gov)

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