There was a pretty good article over at the Washington Post on the tightening of FHA lending guidelines coming down the road. Here are some excerpts:
– Higher down payments. The FHA’s current minimum cash down payment is 3.5 percent. On a $200,000 house, a buyer can bring as little as $7,000 to the table, aside from closing costs. A purchase of a $500,000 house in a high-cost area requires only $17,500 in cash.
Critics say 3.5 percent does not force purchasers to have enough “skin in the game” to discourage them from missing payments or risking foreclosure. Rep. Scott Garrett (R-N.J.) introduced legislation last month requiring a minimum 5 percent down payment for all future FHA loans. …
– Higher mortgage insurance premiums. The FHA charges an “upfront” mortgage insurance premium of 1.75 percent of the loan amount. Most borrowers roll that into their loan and finance it. The agency also charges an annual premium, paid in monthly installments, of either 0.5 percent or 0.55 percent, depending on the down payment. To rebuild reserves, the FHA could tweak one or both premiums to yield more revenue. It could, for example, raise the upfront premium to 2 percent or as high as the current statutory maximum of 2.25 percent. It could also raise the annual fee, but the total premium could not exceed 3 percent under current congressional limits.
Mortgage industry officials say raising premiums would be a logical move, with a gentler impact on borrowers. Lipes calculates that on a $200,000 loan, an increase in the upfront premium to 2 percent — and a move to 0.6 percent on the annual — would raise a borrower’s monthly payment by just $10 at today’s interest rates. …
– Toughening credit standards. In the mortgage market, the FHA is by far the most lenient and flexible player when it comes to evaluating applicants’ creditworthiness. It does not have a minimum credit score, though it permits lenders to impose FICO score minimums. The FHA also traditionally has been far more tolerant of credit-history peccadilloes than Fannie Mae or Freddie Mac. When there are extenuating circumstances associated with credit problems — medical, marital or employment — the FHA seeks to give applicants the benefit of the doubt.
But critics say underwriting generosity can lead to higher delinquencies, foreclosures and losses. They want the FHA to toughen up. In fact, many mortgage market participants would prefer to see the FHA move to the approach used by private insurers — risk-based pricing. Paul Skeens, president of Waldorf-based Colonial Mortgage Group, said the FHA should calibrate premiums to a tiered system of credit scores and down-payment amounts, charging more for borrowers with low down payments and low scores, and less for those with higher cash in the deal and better scores.
