Washington Report: Higher Costs, Tougher Standards

HUD Secretary Shaun Donovan made it official last week: Applicants for FHA insured mortgages in the coming months are going to be hit with higher costs and tougher credit standards.

In congressional testimony, Donovan said some of the changes are likely to include the following:
Number one: Higher downpayments. The current minimum is 3.5 percent. Donovan didn't say how much higher the agency might push it, but congressional critics want to see at least a five percent minimum.
Number two: Look for FHA's generous "seller concessions" to be cut in half -- from the current six percent to three percent of the loan amount -- and maybe even lower.
Under present FHA rules, home sellers can contribute to their buyers' closing costs up to a maximum of six percent of the initial mortgage amount. Critics say that encourages sellers to inflate the prices they want from buyers, and allows marginal purchasers to buy houses they can't really afford.
Number three: Higher mortgage insurance premiums. FHA currently charges what it calls an "upfront" premium of 1.75 percent of the loan amount. That could go a lot higher, maybe even to three percent, according to Donovan.
FHA also charges an "annual" insurance premium, which gets tacked onto borrowers' monthly payments. Currently that premium is set at 0.55 percent of the loan amount, but Donovan wants Congress to raise it.
Finally: Look for tougher credit rules. FHA does not have a minimum credit score for applicants at the moment, preferring instead to evaluate the "total" credit picture of applicants individually.
But now FHA is expected to announce a minimum acceptable FICO score for the first time. It may not be as high as Fannie Mae's or Freddie Mac's, both of which use a 620 FICO minimum, but don't expect it to be much lower either.
Along with tougher rules for loan applicants, Donovan said FHA also plans to crack down hard on lenders who send it poorly-underwritten loans to insure. The agency has already bounced two of its highest-volume producers out of business by withdrawing their approvals to originate FHA mortgages.
Donovan said the agency also plans to post a "Lender Scorecard" on its Website, ranking all its participating mortgage companies according to the delinquency rates on their loans - for all to see - and to raise lender net worth requirements sharply.
Bottom line: Sometime early in 2010, it's going to get pricier and tougher to get financing through FHA. If you or your clients have a home purchase lined up that might be affected, get your loan application in sooner rather than later.
Published: December 7, 2009
Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation.
by Kenneth R. Harney
He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.