A few months back, I noted that the Federal Housing Administration is running out of money. Consequently, it must increase its premiums and tighten its underwriting policies. According to a new report, that's exactly what it's doing. In fact, its new plan makes for significantly stricter standards. But I wonder if Congress will allow the FHA to make these changes.
Here's the plan, according to FHA Commissioner David H. Stevens, via the Washington Post:
Under this plan, the agency would increase the up-front insurance premium that borrowers pay at the closing table from 1.75 percent to 2.25 percent of the loan's value starting this spring.
While most FHA borrowers can continue to make down payments of as little as 3.5 percent when they take out a loan, those with a credit score of less than 580 will have to make a down payment of at least 10 percent, possibly starting in the early summer.
The agency also plans to propose limits on the amount of money sellers can kick in, including by paying closing costs or giving free upgrades. The agency will reduce seller concessions from 6 percent to 3 percent of the home's value, in line with the industry norm, this summer.
Those changes might seem small, but they're pretty significant. That 50 basis point premium hike will raise borrowers' up-front payments by nearly 30%. For example, if the up-front premium payment was $1,750 for a $100,000 home, now it's $2,250.
And for borrowers with worse credit, a 10% down payment is a much stricter standard. Let's continue with the $100,000 home example above. The down payment would have been just $3,500, but will now be $10,000 for a borrower with poor credit.
The borrower will also be paying more in closing costs or losing upgrades. Again, for the $100,000 home, if a borrower had $6,000 in concessions, now he will only get $3,000.
Let's think about that total picture. In the examples above, the total up-front costs for the same property increase from $5,250 to $15,250. That's nearly a 300% increase in up-front costs, for those who like percentages.
I think this plan is quite sensible. The FHA is responding to its too-loose underwriting policies, which led to significant losses. For example, the idea that someone with a credit score below 580 could have made a down payment as low as 3.5% seems like sheer lunacy to me. 10% still seems too low, but at least it's on the right track. The other measures also seek to enhance its portfolio's credit quality.
But will this anger Congress and the President? I think it could. As I mentioned in my prior post about the FHA, it's there to boost the housing market by helping relatively low-income borrowers get mortgages. Obviously, these new standards will make that end more difficult, which means fewer mortgages overall, but certainly fewer for less affluent Americans. Will Congress and the Obama administration object? Stay tuned.