FHA Announces Major Changes

February 5, 2013

From the Mortgage Bankers Association of America

HUD announced a new series of changes aimed at strengthening the troubled FHA Mutual Mortgage Insurance Fund.

The steps include:

• Consolidation of FHA’s Home Equity Conversion Mortgage options;

• An additional 10 basis-point increase in FHA mortgage insurance premiums;

• Requiring borrowers to pay annual mortgage insurance premiums for the life of the loan;

• Requiring lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent;

• A proposed increased down payment requirement for mortgages with original principal balances above $625,500;

• Increased enforcement efforts for FHA-approved lenders regarding “aggressive” marketing to borrowers with previous foreclosures

“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs,” said FHA Commissioner Carol Galante. “In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American home buyers.”

The changes come in the wake of FHA’s most recent actuarial report on the MMIF. The December report said in fiscal 2012, the Fund’s capital reserve ratio fell below zero to negative 1.44 percent, well below its congressionally mandated 2 percent capital reserve ratio, while the Fund’s economic value fell to negative $16.3 billion.

The report cited continued losses stemming from FHA’s former practice of allowing down payment assistance programs, as well as losses from FHA’s Home Equity Mortgage Conversion program, also known as reverse mortgages and spurred concerns on Capitol Hill that FHA might have to ask the federal government for additional financial support. HUD Secretary Shaun Donovan in December said no such decision would take place until the Obama Administration submits its proposed fiscal 2014 budget in February.

A summary of FHA actions announced yesterday:

Home Equity Conversion Mortgage Consolidation. FHA said it will consolidate its Standard Fixed-Rate Home Equity Conversion Mortgage and Saver Fixed-Rate HECM pricing options, effective for FHA case numbers assigned on or after April 1. Galante noted the Fixed-Rate Standard HECM pricing option currently represents a “large majority” of the loans insured through FHA’s HECM program and is responsible for placing “significant stress” on the MMIF. 

“To help sustain the program as a viable financial resource for aging homeowners, the HECM Fixed-Rate Saver will be the only pricing option available to borrowers who seek a fixed interest rate mortgage,” FHA said. “Using the HECM Fixed-Rate Saver for fixed-rate mortgages will significantly lower the borrower’s upfront closing costs while permitting a smaller pay out than the HECM Fixed Rate Standard product, thereby reducing risks to the Mutual Mortgage Insurance Fund.” 

Additional details can be found in a new HECM Mortgagee Letter: http://portal.hud.gov/hudportal/documents/huddoc?id=13-01ml.pdf.

Changes to Mortgage Insurance Premiums. FHA said it will increase its annual mortgage insurance premium for most new mortgages by 10 basis points (0.10 percent) and will increase premiums on jumbo mortgages ($625,500 or larger) by 5 basis points or 0.05 percent. These premium increases exclude certain streamline refinance transactions. 

FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan, reversing a 2001 change in which FHA cancelled required MIP on loans when the outstanding principal balance reached 78 percent of the original principal balance. FHA acknowledged that it remained responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, a term which often extends far beyond the cessation of these MIP payments. 

Galante said FHA’s Office of Risk Management and Regulatory Affairs estimated that the MMIF has foregone “billions of dollars” in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy.

“Therefore, FHA will once again collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled,” Galante said. “This will permit FHA to retain significant revenue that is currently being forfeited prematurely.”

Manual Underwriting Requirement on Loans with Decision Credit Scores below 620 & DTI Ratios Above 43 Percent. FHA will require lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent. Lenders will be required to document compensating factors that support the underwriting decision to approve loans where these parameters are exceeded, using FHA manual underwriting and compensating factor guidelines.

Raising Down Payment on Loans above $625,500. Through a Federal Register notice to be published in the next several days, FHA will announce a proposed increased down payment requirement for mortgages with original principal balances above $625,500. The minimum down payment for these mortgages will increase from 3.5 to 5 percent. 

“This change, coupled with the statutory maximum premiums charged for these loans, will help protect FHA and further facilitate its efforts to encourage higher levels of private market participation in the housing finance market,” FHA said.

Access to FHA after Foreclosure. FHA also announced it will step up its enforcement efforts for FHA-approved lenders regarding aggressive marketing to borrowers with previous foreclosures and remind lenders of their duty to fully underwrite loan applications. FHA also said it will work with other federal agencies to address such false advertising by non-FHA-approved entities. 

“It has come to FHA’s attention that a few lenders are inappropriately advertising and soliciting borrowers with the false pretense that they can somehow ‘automatically’ qualify for an FHA-insured mortgage three years after their foreclosure,” FHA said. “This is simply not true and such misleading advertising will not be tolerated.”