FHA Amendment Proposes To Raise Downpayments, Lower Loan Sizes
The legislation was introduced last week which would amend the National Housing Act and dramatically change how FHA mortgages work.
For homeowners with existing FHA-insured mortgage, or for home buyers looking to use FHA financing, the proposed amendment would limit your loan size; raise your loan costs; and, in some cases, lift the FHA's standard 3.5% downpayment requirement all the way to 20%.
If you're planning to use an FHA mortgage in 2013, take steps now to avoid potential changes.
FHA : Larger Market Share, Larger Market Losses
The Federal Housing Administration (FHA) is not a mortgage lender. Rather, it's an insurer of mortgage lenders. When a bank makes a loan that meets FHA minimum standards, the agency agrees to insure that bank against loss in the event of a foreclosure, for example.
In 2006, the Federal Housing Administration held a very small mortgage market share. It insured less than 5% of all purchase money home loans. However, between 2006-2009, as the private mortgage market evaporated, FHA market share grew.
- 2006 : 4.5% of all purchase money loans were FHA-backed loans
- 2007 : 6.1% of all purchase money loans were FHA-backed loans
- 2008 : 24.1% of all purchase money loans were FHA-backed loans
- 2009 : 32.6% of all purchase money loans were FHA-backed loans
By Q2 2010, the FHA was insuring nearly 38% of all new mortgages and it's easy to understand why.
Aside from VA loans for military borrowers and USDA loans for rural housing which both allow for 100% financing, the Federal Housing Administration gave home buyers their lowest downpayment option -- 3.5 percent -- and, for buyers with credit scores under 740, the lowest mortgage rate available in a highly competitive market.
And this is how the FHA's troubles started.
Because the agency was insuring low-downpayment/low-FICO mortgages, its loan default rates climbed to levels beyond its loss projections. Reserve funds shrank below congressionally-mandated levels, threatening the group into insolvency. The FHA recognized a need to recapitalize and it wasted no time in taking its next steps.
Formed as part of the National Housing Act of 1934, the Federal Housing Administration is self-funded government agency and has never accept taxpayer monies. The group pays for its costs using its Mutual Mortgage Insurance (MMI) fund, which is funded by FHA-insured homeowners and their respective mortgage insurance premium (MIP) payments.
To refill the coffers, beginning in 2008, the FHA started raising MIP.
2008-2012 : FHA Raises Mortgage Insurance Premiums
By law, the Federal Housing Administration is required to maintain a 2% reserve ratio. This means that for every $100 of loans insured by the group, the agency is required to keep $2 "on hand"; available for claims.
However, because large numbers of low-quality loans made it to the FHA books beginning in 2006, the group's reserve ratio dwindles from 6.4 percent in 2007 to a negative number in the most recent fiscal year.
The decline has been slow and steady :
- 2007 : Reserve ratio of 6.4%
- 2008 : Reserve ratio of 3.0%
- 2009 : Reserve ratio of 0.53% (below the 2% mandate)
- 2010 : Reserve ratio of 0.50% (below the 2% mandate)
- 2011 : Reserve ratio of 0.24% (below the 2% mandate)
- 2012 : Reserve ratio of -1.44% (below the 2% mandate)
The Federal Housing Administration has several options to fight falling reserve ratios. It can choose to raise its mortgage insurance premiums schedule; and it can tighten its loan standards so that only higher-quality home loans get FHA-approved.
Since 2008, the group has tried to focus exclusively on raising mortgage insurance premiums; the amount paid by FHA-insured homeowners into the Mutual Mortgage Insurance fund used to pay FHA defaults. With more money collected, reserve ratios rise, of course.
In January 2008, FHA-insured homeowners paid MIP at the rate of 0.50 percent per year, or $500 per $100,000 borrowed. That amount looks downright cheap as compared to today's MIP rate.
Today, homeowners in high-cost areas such as Loudoun County, Virginia; Montgomery County, Maryland; San Jose, California; and New York, New York borrowing at the local FHA loan limit of $729,750 pay triple that rate from 2008. Today's FHA annual MIP is as high as 1.50%, depending on your loan size.
And yet, that's still not enough keep the FHA reserve ratio in the black.
Already, the Federal Housing Administration has announced a 0.10 percentage point mortgage insurance premium increase for early-2013, plus it may change the amount of upfront mortgage insurance it charges to homeowners, too.
It would mark the sixth change to MIP rates since October 2008.
It should be noted, though, that, to date, the Federal Housing Administration has avoided substantially toughening its loan standards. This is in keeping with the agency's mission to maintain and expand homeownership nationwide.
Something, however, may have to give. And it may give soon.
Proposed For 2013 : Lower Loan Limits, 20% Down
In early-December, a member of the Senate Banking Committee introduced FHA-changing legislation that would fundamentally change the way that U.S. home buyers and existing FHA-insured homeowners use FHA-backed home loans.
The effects of the "FHA Stabilization and Reform Amendment" would be wide-reaching.
First, it would reduce the maximum allowable FHA loan size from $729,750 to $625,500 in designated high-cost areas. This move would not affect homeowners in cities such as Columbus, Ohio; Philadelphia, Pennsylvania; and, Denver, Colorado where FHA loan limits are less than the current $729,750 loan ceiling.
However, for homeowners in Orange County, California; and, Alexandria, Virginia, for example, this would reduce the maximum loan size available via the FHA by 14 percent.
Second, the "FHA Stabilization and Reform Amendment" would raise the minimum FICO score for all FHA applicants to 620. Currently, the FHA has no stated minimum credit score. First-time buyers and others with limited documented credit would no longer be FHA-eligible.
Third, the "FHA Stabilization and Reform Amendment" would require a 20% downpayment from home buyers who experienced a foreclosure within 7 years of the new purchase loan application date.
The amendment includes language meant to reform reverse mortgages, too.
Beat The Changes : Apply For FHA Loans Now
The "FHA Stabilization and Reform Amendment" has not passed Congress, but it's a sign of what's to come for FHA financing. Default rates from last decade remain high and today's higher mortgage insurance premiums can only raise reserve ratios so far. The rest of the FHA's rebound will be policy-related.
Therefore, if you plan to use FHA financing for an upcoming purchase, or for an FHA Streamline Refinance, expect better loan terms, lower mortgage rates, and cheaper MIP by doing something today as opposed to "when you get around to it".
The FHA is making loans more costly for its new customers. You won't want to be one of them.