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Home / Government / Federal Housing Administration to raise fees (10:58 a.m. 1/20/10)

Federal Housing Administration to raise fees (10:58 a.m. 1/20/10)

By Alan Zibel
AP Real Estate Writer

Washington (AP)— The Federal Housing Administration is raising fees and tightening lending standards to shore up its strapped finances and avoid a taxpayer bailout.

The government agency has seen its losses rise with the foreclosure rate. Its reserves have sunk below the minimum level required by Congress. A healthy FHA is vital for the housing market because it insures roughly 30 percent of new loans, and is the largest backer of mortgages to first-time buyers.

The changes, which will go into effect in the first half of the year, “are among the most significant steps to address risk in the agency’s history,” according to a statement attributed to FHA Commissioner David Stevens.

The FHA does not make loans, but rather offers insurance against default. Borrowers are willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price — and that didn’t change.

The new policies are designed to bring more revenue into the agency, while at the same time keeping loans available.

Under the changes, homebuyers will:

* Pay an upfront mortgage insurance premium of 2.25 percent of the total loan amount, up from the current level of 1.75 percent. A borrower taking out a $200,000 mortgage would pay a $4,500 fee, for example, rather than the current fee of $3,500. Borrowers will still be able to wrap these fees into the total amount borrowed. FHA officials also plan to ask Congress to increase the maximum annual premium that FHA can charge.

* Need a credit score of at least 580 to qualify. Many FHA lenders already require a higher score, but there had been no standard requirement across the program.

Borrowers with a score lower than 580 will need a down payment of at least 10 percent.

The changes come as borrowers with loans backed by the agency have increasingly been falling into default. More than 18 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 14 percent for all loans, according to the Mortgage Bankers Association.

Mortgage lenders “will find the new rules painful but necessary,” said Howard Glaser, a mortgage industry consultant and former housing official during the Clinton administration.

There also have been fears that unscrupulous operators have shifted their business to the FHA after the subprime business went bust. Last week, the agency served subpoenas on 15 mortgage companies with suspiciously high default rates for FHA loans, part of a broad crackdown on dubious lenders.

The agency has already taken action against several problem lenders. One of the nation’s biggest mortgage bankers, Taylor, Bean & Whitaker Mortgage Co. of Ocala, Fla., was banned from the FHA program in August and filed for Chapter 11 bankruptcy protection. Another mortgage company, Lend America, was kicked out in November.

One comment

  1. It appears that government never gets it right. If FHA expects to increase its mortgage insurance premium reserve while making it much more difficult to buy a home using FHA, I fear that they will be disappointed. About 30% of the current housing market is using FHA insured financing, primarily because it is one of the very few mortgages remaining that deals with the problem faced by most first-time buyers, the up-front cost. FHA has already increased the down payment requirement and done away with seller-funded down payment assistance since they see a lack of investment as a cause of foreclosures. While it is true that a low investment equal low equity, the real culprit that no one is addressing is the staggering loss of equity due to lower housing values. If anyone is forced to sell a property and has no equity, it does not matter if they invested $3,000 or $30,000, the bank is still going to get the keys back. By making it harder to buy a home, FHA and Congress are lowering demand which will eventually lead to lower housing values. This is very likely to happen as soon as the housing tax credits end on April 30th. Expecting to increase the MIP insurance reserves by increasing costs will have the opposite affect since fewer people will buy and even fewer will use FHA. It seems that the medicine they are giving the patient will wind up killing him!

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