FHA Will Tighten Credit Standards
By James R. Hagerty
The Wall Street Journal
September 19, 2009
The Federal Housing Administration, which insures lenders against losses on home mortgages, announced Friday that it would tighten credit requirements but said it has enough reserves to handle expected claims.
"There will be no taxpayer bailout," FHA Commissioner David Stevens said.
The agency confirmed that, as of Sept. 30, it would fall short of a legal requirement that it maintain supplementary reserves of 2% of the loans it insures. Those reserves supplement a fund that provides for projected claims over the next 30 years. The extra capital cushion last year was about 3%, down from 6.4% in 2007. The Washington Post reported Friday that the FHA expected to fall short of the 2% minimum, something outside experts have long said was likely.
Mr. Stevens said tighter credit standards would suffice to rebuild the cushion to 2% or more, and that the FHA wouldn't need to raise the premiums borrowers pay or seek an increase in its minimum down-payment requirement of 3.5%.
The FHA has taken a much bigger role in the mortgage market during the past two years, as investors have shied away from home loans that lack government backing. In this year's first half, about 19% of new home mortgages were insured by the FHA, up from about 2% in 2006, according to the trade publication Inside Mortgage Finance.
Under planned rules, the agency said lenders making FHA-insured loans would need to show net worth of at least $1 million, up from $250,000, and further increases might be sought later. The agency is seeking to ensure that lenders have funds available to compensate the FHA if their loans fail to meet quality standards.
For refinancings of FHA loans, the agency plans new rules for verifying income and other quality-control checks. It also will impose a maximum loan value of 125% of the current estimated home value on refinanced loans, in line with government-backed mortgage investors Fannie Mae and Freddie Mac.
Appraisals will be valid for no more than four months, down from six to 12 months previously. The FHA also plans to change rules aimed at averting pressure on appraisers, making them more consistent with those adopted earlier this year by Fannie and Freddie. Mortgage brokers or bank employees paid on commission won't be allowed to order appraisals.
In addition, the FHA plans to hire a chief risk officer for the first time.
"These are things they should have been doing for a long time," said Tom Lawler, an independent housing economist in Leesburg, Va.
The FHA said it had more than $30 billion of total reserves, including the primary fund and the extra cushion. That equates to 4.4% of the value of loans it insures.
The FHA earlier reported that in July 7.8% of the single-family mortgages it insured were 90 days or more overdue or in the foreclosure process, up from 6.6% a year earlier. For the second quarter, about 8% of all home mortgages were 90 days or more past due or in foreclosure, according to a survey by the Mortgage Bankers Association.
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