President Obama's Budget Confirms Changes to FHA (Mortgage Insurance, Credit Scores,Seller Contributions)

As you probably know, changes to the FHA upfront and possibly the monthly mortgage insurance premiums, seller contributions, down payment and credit score issues are set to be implemented in the near future. The following are highlights taken from the Presiden't budget proposal confirming these pending changes as well as clarifying lender responsibilities in providing a sound underwriting process.

"On February 1, 2010 the President released his proposed budget for FY 2011. Below are the highlights:

**The budget proposes the following legislative changes:

Increase the maximum annual MIP to at least .90%. (This is the maximum factor that could be used to compute the monthly portion included in the buyer's payment. It could wind up being less. This just raises the maximum allowed if FHA feels the change is necessary).)

The budget states that if this legislation passes FHA will have the flexibility to lower the upfront MIP and increase the annual MIP. The budget provides an example that under this new authority FHA could reduce the upfront MIP to just 1.0% and increase the annual MIP to approximately .90% for low downpayment mortgages (.85% for lower LTVs).

Allow FHA to withdraw the origination and underwriting approval for a lender nationwide based upon the default/claims rate of just one or more branch offices of the lender.
Provide HUD with broader loan indemnification authority against all Direct Endorsement lenders.

While no additional details were provided, we were encouraged that this provision was not highlighted during the Budget briefing. We are increasingly hopeful that this provision is designed to protect FHA from legal challenges concerning its ability to require indemnifications rather than expand the reasons for indemnifications.

****The budget contains the following proposed administrative changes:

Increase the upfront MIP to 2.25%.

Of course, HUD has already notified the industry of this change by issuance of Mortgagee Letter 2010-2. The upfront MIP will increase to 2.25% for all purchases and refinances effective case numbers assigned on or after April 5, 2010.

Implement a combination of minimum FICO scores and maximum LTVs. Borrowers must have a minimum FICO score of 580 to be eligible for an LTV above 90%. Borrowers with a FICO score below 580 will be limited to a maximum LTV of 90%.

HUD has stated that this change will be published in the Federal Register before the end of February and after a period for public comment will be implemented in the early summer.

Reduce seller concessions from the current 6% to 3% to bring FHA in conformity with general industry standards on seller concessions.

HUD has stated that this change will be published in the Federal Register before the end of February and after a period for public comment will be implemented in the early summer.

Implement the loan indemnification provisions relating to the Lender Insurance (LI) program.

Section 256 of the National Housing Act authorized the present LI program and also gave HUD specific authority to require loan indemnification for fraud or misrepresentation by the LI lender. HUD has stated that this change will be published in March in the Federal Register and after a period of public comment will be implemented in the early summer.

The above proposals are administrative changes that can and are expected to be implemented without legislation. Therefore, we expect that all of these changes will be implemented by Summer as HUD has stated.

Implement Credit Watch termination program for lender Direct Endorsement underwriting.

Of course, HUD has already implemented this initiative by publishing HUD Mortgagee Letter 2010-03.

***** FHA volume

The budget does anticipate that FHA volume will decline 10% in 2010 (from 1.8 million mortgages to 1.66 million mortgages) and decline an additional 20% in FY 2011 to 1.3 million units as the economy and the private mortgage insurance industry recover. These are just estimates for budget purposes and have no effect on the availability of FHA financing. FHA’s credit authority was extended for FY 2011 to $400 billion, which will fund over 2 million loans.

***** Budget Analysis
There were no surprises in the Budget--which is very encouraging. FHA’s financial condition has apparently stabilized. HUD has telegraphed these budget proposals since December 2009 when the Secretary and the Commissioner testified at Congressional hearings. "

To post a comment on this blog post, you must be an HAR Account subscriber, or a member of HAR. If you are an HAR Account subscriber or a member of HAR, please click here to sign in. If you would like to create an HAR Account account, please click here.

Disclaimer ↓

Join My Blog

Information Affecting Residential and Commercial Real Estate Markets