Earlier this year, the Federal Housing Administration (FHA) announced several new policy changes to strengthen FHA and secure the long term viability of FHA’s programs. The changes address credit policies and increased enforcement efforts to ensure compliance with FHA guidelines and standards. This month’s FHA update summarizes these credit policy changes, as well as other guidance in recent mortgagee letters.
Increase in Upfront Mortgage Insurance Premium.
FHA increased the upfront mortgage insurance premium by 50 basis points to 2.25 percent for purchase money and refinance transactions, including FHA-to-FHA credit-qualifying and non-credit qualifying streamlined refinance transactions. This change is effective for FHA loans for which the case number is assigned on or after April 5, 2010. FHA implemented this policy change through Mortgagee Letter 2010-02 (January 21, 2010).
In addition, FHA is pursuing legislative authority to increase the statutory cap on the annual mortgage insurance premium. If this authority is granted, FHA intends to shift some of the premium increase from the upfront premium to the annual premium. The shift will lessen the immediate impact of the additional cost to the consumer because the annual premium is paid over the life of the loan rather than at the time of loan closing.
Update of Credit Score and Downpayment Requirements.
FHA proposes to update the combination of FICO scores and downpayments for new borrowers to allow FHA to better balance its risk. New borrowers with a FICO score of 580 or above will qualify for FHA’s 3.5 percent downpayment program. New borrowers with a FICO score of less than 580 will be required to have a minimum downpayment of 10 percent. FHA expects this change to take effect in the early summer, following a notice and comment period.
Reduction in Allowable Seller Concessions.
FHA proposes to reduce allowable seller concessions from 6 percent to 3 percent. FHA believes that the current level creates incentives to inflate property values exposing FHA to excess risk. The proposed change conforms to industry standards for seller concessions. FHA expects this change to take effect in the early summer, following a notice and comment period.
Temporary Waiver of Rules on Property Flipping.
FHA is waiving for one year, beginning February 1, 2010, certain policies concerning property flipping. FHA regulations provide that a mortgage for a property will not be eligible for FHA insurance if the contract of sale for the purchase of the property is executed within 90 days of the prior acquisition by the seller, and the seller does not fall within an exemption from the 90-day rule. This restriction has adversely impacted the recovery of the housing market given the dramatic increase in foreclosures in the past two years and the volume of REO properties in need of rehabilitation.
Under the waiver, the sales transaction must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the transaction (and no pattern of previous flipping activity within the prior 12 months). If the sales price of the property is 20 percent or more over the seller’s acquisition cost, a property inspection and additional documentation to substantiate the increase in value are required. In addition, the waiver applies only to forward mortgages and does not apply to the Home Equity Conversion Mortgage (HECM) program.
Loss Mitigation for Imminent Default.
In Mortgagee Letter 2010-04 (January 22, 2010), FHA defines “imminent default” for loss mitigation purposes. An “FHA borrower facing imminent default” is an FHA borrower that is current or less than 30 days past due on the mortgage obligation and is experiencing a significant reduction in income or some other hardship that will prevent him or her from making the next required payment on the mortgage during the month that it is due.
The letter provides guidance to servicers on loss mitigation options available to borrowers facing imminent default. At this time, FHA is limiting these options to certain forbearance agreements, as described in the letter, and to FHA-HAMP. The guidance became effective on January 22, 2010.
Removal of One Percent Origination Fee Cap.
In Mortgagee Letter 2009-53 (December 30, 2009), FHA eliminated the one percent origination fee cap for its standard mortgage insurance programs. Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance Programs retain their statutory origination fee caps. The letter states that FHA expects that lenders will continue to charge fair and reasonable fees for all origination services and that FHA will monitor lenders to ensure that borrowers are not overcharged. FHA intends to issue additional guidance on fee limitations.
Mortgagee Letter 2009-53 also clarifies how fees and charges for FHA-insured loans must be disclosed on the new Good Faith Estimate and HUD-1 Settlement Statement. The letter provides specific instructions on disclosing origination charges and seller credits.
Short Sales and Short Pay Offs.
In Mortgagee Letter 2009-52 (December 16, 2009), FHA provides guidance regarding borrower eligibility for a new FHA mortgage when a previously owned property was sold for less than what was owed (short sale) or when there is a principal write down of indebtedness that cannot be refinanced into a new mortgage (short pay off). The guidance became effective on December 16, 2009.
Borrowers are considered eligible for a new FHA mortgage if they were current on their mortgage and other installment debts at the time of the short sale and if the proceeds from the short sale serve as payment in full. Borrowers are not eligible for a new FHA mortgage if they pursued a short sale simply to take advantage of declining market conditions, and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance. Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA mortgage for three years from the date of the pre-foreclosure sale, although there are exceptions to this rule.
To be eligible for refinancing with a short pay off, borrowers must be current on their mortgage. FHA will insure the first mortgage where the existing note holder writes off the amount of indebtedness that cannot be refinanced into the new mortgage due to a decline in property value and/or a reduction in income.
Sharon Bangert is a partner in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can reach Sharon at 202-327-9703 or by email at sjbangert@hudco.com.