Changes coming to FHA loans

Ah, Uncertainty. Perhaps the government’s forté, always in close competition with pandering and self-preservation. What will the impact be on homebuyers and sellers in the Charlottesville area real estate market? The answer is uncertain, and likely won’t be known until we are able to look back at 2010 from 2015.

FHA Buyers may have to come up with more money for a downpayment. And this may not be an altogether bad thing. People need to have “skin in the game.” What we need is clarity and certainty, neither of which are strengths of the government.

All told, the possible changes make sense.

Charlottesville sellers may find themselves with an even smaller pool of buyers to which they will be able to market.

Increased supply + reduced demand may equal more temperate housing prices in the Charlottesville region.

FHA Loan limits for Charlottesville MSA were last increased in November 2008.

Currently, the FHA limits remain the same – $437,000 for a single family property, $559,450 for s two-family property

What are others saying?

Rightly or wrongly, FHA loans have been among the most frequently-used loans in this new real estate and finance world. (bolding mine)

With so many borrowers unable to meet today’s stricter lending requirements, FHA-backed loans have become increasingly popular. Today, the FHA guarantees nearly 3 of every 10 new home mortgages. That’s a stunning increase from 2006, when the agency backed roughly 3 percent of new home loans. Meanwhile, the agency’s finances have deteriorated considerably. The seasonally adjusted delinquency rate for FHA loans increased from about 13 percent in the third quarter of last year to 14.36 percent in this year’s third quarter. At the same time, the agency’s capital reserve ratio dipped below the level that Congress mandates. In the face of mounting political pressure, the Obama administration has announced new steps that may make it more difficult for some borrowers to obtain mortgages backed by the agency. The steps include raising the minimum FICO score, increasing up-front cash requirements, and possibly charging higher insurance premiums. “We want to ensure that we are able to continue to support the housing market in the short term and provide access to homeownership over the long-term, while minimizing the risk to the American taxpayer,” Housing and Urban Development Secretary Shaun Donovan told a congressional committee in written testimony.

Google Trends - FHA Loans in Virginia
Google Trends search for “FHA” in Virginia

From the Wall Street Journal:

Among the changes under consideration:

• Raising the annual insurance premiums that borrowers must pay. This is the easiest place to start, but it would raise borrowing costs for home buyers. The FHA charges an upfront insurance premium of 1.75% of the total cost of the mortgage which most borrowers can roll into their loan, and then they pay additional annual premiums of either 0.5% or 0.55%, depending on their down payment.

• Setting a credit score floor for borrowers. The agency hasn’t decided what that minimum might be, but it says it is looking at requiring borrowers with minimum down payments to have higher credit scores. While the FHA doesn’t currently have a cutoff, most of the nation’s top lenders have instituted a minimum 620 credit score for FHA borrowers.

• Requiring buyers to bring more money to the closing table. The FHA says that it will limit the amount of money that sellers can provide for closing costs on home sales to 3% of the home price, from the current level of 6%. Agency officials say they are also considering potential increases in down payments, but such a move could face heavy opposition from the real-estate industry. The head of the National Association of Realtors says such an effort as would “disenfranchise” FHA borrowers.

• Making FHA-approved lenders more accountable for loans that they submit to the agency. The FHA doesn’t make loans, but it instead insures lenders against losses on loans that conform to its standards. In recent months, the agency has moved more swiftly to expel lenders that it says are putting the agency at risk. For example, on Monday, the agency terminated its approval for Ideal Mortgage Bankers, Ltd. and affiliate Lend America to make FHA-backed loans. Lend America on Tuesday said it would cease operations but that it plans to appeal that decision.

Jay, the Phoenix Real Estate Guy has more.

The highlights of the FHA policy proposal:

  • Reducing the maximum allowable seller concessions from it’s current 6% of sales price to 3%.
  • Raising the minimum FICO score (“credit score”) required to qualify for an FHA loan.
  • Increasing the up-front cash that a borrower has to bring to the table in an FHA backed loan.
  • Investigating an increase in the up-front mortgage insurance premium a buyer is required to pay.
  • Asking Congress to raise the annual mortgage premium a FHA buyer has to pay.

More at Calculated Risk.

Even more at the Big Picture.One close observer of the mortgage channel, who we hope to interview soon in The IRA, says that given the recent deterioration of mortgage credit, it is impossible that BAC has not gotten its pari passu portion of the losses which are hitting the FHA. The same source says that using conservative math, FHA has another $75 billion in losses to take, with zero left in the FHA insurance fund. Worst case for FHA is double that number, we’re told. How could the Fed believe that BAC, which is the biggest owner of mortgages and HELOCs, is immune from this approaching storm? Because the Fed is cooking the books of the largest banks.

But don’t take anyone else’s word for it – educate yourself at one of my two favorite sites:

OpenCongress – H.R.3706 – FHA Taxpayer Protection Act of 2009

GovTrack – H.R. 3706: FHA Taxpayer Protection Act of 2009

I wish government would start protecting taxpayers’ money by not taking as much and wasting as much in the first place.

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