- Increase Mortgage premiums: Galante indicated that the FHA will increase the mortgage insurance premium for larger loans to the maximum, currently 1.55% (or 155 bps).
- Increase down payment requirements: The letter committed the FHA to change their maximum loan to value ratio for larger loans. Instead of the current 3.5% down payment, borrowers will need to put in at least 5%.
Galante promised to implement these changes by January 31, 2013. Bills.com will continue to update you about these and other changes in the FHA mortgage programs.
The FHA continues to struggle with losses, especially those relating to their single-family mortgage loan programs. According to an independent audit, the FHA is running a negative capital reserve of $16.3 billion. If the FHA does not take aggressive corrective actions, it may need to draw upon treasury funds (a bailout by taxpayers) in order to meet their financial obligations.
Due to the seriousness of their problem, the FHA is planning to make a number of changes in their mortgage programs, including:
Secretary of HUD (Housing and Urban Development), Shaun Donovan, presented to the Sen. Banking Committee testimony, on December 6, 2012, regarding the FHA’s financial position and plans for the upcoming year. The FHA has yet to announce firm changes in their program, however HUD Secretary Shaun Donovan indicated that some of these changes will commence in 2013.
Sec. Donovan indicated in his testimony that he is concerned about the possibility of a bailout; however, the FHA is planning on increasing its revenue and cutting its loss through new loan requirements and other administrative actions. He hopes that the FHA can avoid tapping into the treasury. A strong housing market recovers will help restore the FHA's balance sheet (due to appreciation of housing prices). Sec. Donovan is taking steps to balance between helping weaker sectors of the economy receive mortgage loans and purchase homes without hurting the FHA's precarious financial situation and at the same time ensure that the housing market recovers.
The FHA mortgage program is an important loan program, especially for borrowers with either a credit scores and/or low down-payment that would prevent them from qualifying for a conventional loan. Although FHA loans have high upfront mortgage fees and high monthly mortgage insurance premiums, they are an important source of funds for mortgage borrowers, especially first-time homebuyers.
The FHA's market share of purchase loans dropped during the 2005-2008 period to about 2% for all home loans. Since then it has increased, reaching about a 12% market share. The chart below shows the market share for all home purchase loans since 1993 through the first 7 months of 2012.
Here are some of the steps that the FHA has taken to increase its revenues or cut its losses:
- The National Mortgage Settlement, which targeted big lenders for their poor foreclosure activities, brought in $1 billion of income.
- Based on the 2012 Actuarial report the 2005-2008 loans contributed about 1/3 of the total losses. The loans with credit score under 580 and/or seller-funded down-payment assistance accounted for more than 44% of these losses.
- The FHA has increased revenue by more than $10 billion since 2009. Their policy has been to tread lightly and provide a counter-balance to the housing crisis and keeping credit available, especially to first-time buyers and weaker sectors.
- The FHA has reduced the time in inventory by 45% and decreased the gap between appraised values and sales prices by 62%
In order to bolster their financial position the FHA is considering the following steps:
Raise MIP Fees: The FHA is already planning on raising the mortgage insurance premiums in 2013 at least another 10 basis points, or 0.1%. That translates to another $200 per year for a $200,000 loan.
Cancel Termination Policy: Currently the FHA provides a lifetime guarantee for loans it books; however, in general, the borrower only pays premiums until the loan reaches a 78% loan to value ratio (LTV), based on the original value of the house and the original payment schedule. In contrast, Private Mortgage Insurance (PMI) has limited coverage (not 100% of the loan, but up to 30%. PMI has an automatic termination clause, generally 78%. Once terminated the borrower no longer pays for the insurance and the lender is no longer covered for potential losses.
Because of the drop in housing values, the FHA is facing increasing amounts of loans in which the borrower no longer pays for insurance, but the FHA still guarantees 100% of the loan. Sec. Donovan indicated in his remarks to the Senate Banking Committee on December 6, 2012, that there will be an increase of 10 basis points, or 0.1% on FHA loans, beginning in 2013.
A major criticism of the FHA is that it is carrying a loss due to its very lenient loan underwriting process. This included the following elements:
- Sec. Donovan did not commit to any firm number, however indicated that there is a need to create new underwriting rules.
- Sec. Donovan came out in favor of lowering loan limits, however he indicated that this will require Congressional action. According to an FHA announcement of December 12, 2012, the 2013 maximum loan limits are not changing.
- Once again, while there is pressure to establish stricter credit requirements, the FHA is not committing itself to these changes. Sec. Donovan believes that there needs to be opportunities for those hit by the economic crisis, including borrowers who may have had a foreclosure.
The FHA is suffering huge losses, mainly due to poor loans it booked during the 2005-2008 period. The huge downturn in housing prices added to their losses and created a potential for a treasury bailout.
During 2012, the FHA has already taken steps to improve its financial position, including improving the management of their portfolio and increasing prices to the consumer. The FHA, being an important player in today’s mortgage market, is trying to balance between profitability and supply.
FHA loans are an important source of loans for borrowers with lower credit scores and/or lower down payments. This is especially true for first-time homebuyers. Upcoming changes, including the increase in MIP will certainly change the market.
Bills.com will continue to provide updated information about FHA and other mortgage loan requirements.