You may have seen headlines last week about the Federal Housing Administration (FHA) needing a taxpayer "bailout" by the Treasury and thought: Uh oh. Is the FHA heading down the fiscal drain like Fannie Mae and Freddie Mac, which have required billions in federal assistance just to stay in business?
The good news answer for FHA’s traditional borrowers – primarily moderate-income, first-time purchasers, people with limited cash for down payments and less-than-perfect credit histories – is no. There is a strong possibility that FHA will not require any money transfer from the Treasury, which in any event would not occur until next September. Meanwhile FHA is making tweaks to its program rules that could affect some loan applicants in the months ahead, and which are designed to improve revenue flows to the agency and cut back on losses.
Among the most immediate changes, new borrowers early next year are likely to be charged slightly higher annual mortgage insurance premiums – 1.35 percent of the loan balance rather than 1.25 percent at present. On loans above $625,500 in high-cost areas such as California and metropolitan Washington, D.C., the annual premium will go from 1.5 percent to 1.6 percent. This will not be a major problem for most people, but it could cause some buyers to check out FHA’s competitors – private mortgage insurers whose monthly premiums on loans for applicants with high credit scores may be more attractive than FHA’s.
To increase revenue streams long term, FHA is also abandoning its practice of allowing borrowers to cancel their annual mortgage insurance premium payments when their loan balance drops to 78 percent of the property value. In effect, this will mean that borrowers obtaining 30-year FHA loans could be paying premiums for decades.
Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, Calif., thinks it could encourage some higher-credit-quality borrowers to “refi out” of their FHA loans and seek better deals in the conventional marketplace. But Paul E. Skeens, president of Colonial Mortgage Group in Waldorf, Md., sees it differently: With fixed 30-year mortgage rates in the mid- to upper-3 percent range and virtually certain to increase – maybe significantly if the economy improves in the coming years – “everybody is going to want to keep these loans forever,” he predicts. “They’re not going to want to refi.”
Other Changes On The FHA Horizon
More financial counseling for applicants who have low FICO credit scores, are purchasing their first homes, and are seeking to make minimum 3.5 percent down payments.
A new short-sale program that reaches out to existing FHA homeowners who are seriously delinquent and heading toward foreclosure. FHA Commissioner Carol J. Galante said the agency plans to streamline the short-sale option – where owners are permitted to sell their house for less than the balance on the mortgage – in order to avoid the huge costs of foreclosures.
Structural alterations to FHA’s reverse mortgage program, which allows senior homeowners to withdraw funds based on the equity in their properties. The program dominates the industry and accounts for the vast majority of outstanding reverse loans in the country, but has produced inordinate losses to the FHA insurance fund because of home-value declines and the failure of some borrowers to make their property tax and insurance payments, thereby triggering foreclosures. Though few details are yet available and Congress would have to approve any statutory changes, Galante said the agency plans to restrict the amounts that seniors can draw down in a lump sum up front, among other remedial actions next year.
Galante’s predecessor as commissioner, David H. Stevens, now chief executive of the Mortgage Bankers Association, said in an interview that FHA also needs to consider some form of basic "qualification standards” – applicants should have sufficient income and assets – to ensure that they don’t blow through their initial lump sum draw-downs and have nothing left over to pay taxes and insurance. Currently. there are no such requirements.
The bottom line on FHA’s forthcoming program tweaks? Jeff Lipes, vice president of Rockville Bank in Hartford, Conn., put it this way: FHA isn’t making fundamental changes. Its basic mix of enticements – low down payments, low credit score requirements and generous underwriting rules compared with competitors – aren’t going away, "so I don’t think [the tweaks] will have that great an impact on most FHA buyers."
Ken Harney may be reached at kenharney@earthlink.net.
