The Federal Housing Administration (FHA) continues to move forward with the policy changes announced earlier this year to strengthen FHA and preserve its role in providing homeownership opportunities to underserved borrowers. This month’s FHA update summarizes the Obama administration’s legislative proposal to implement some of the policy changes, as well as guidance in recent mortgagee letters regarding HECM documents and REO property appraisals.
FHA Reform Act of 2010
In January, FHA proposed a number of policy changes to mitigate risk and strengthen FHA’s capital reserves. Some of these changes require legislative action, and Rep. Maxine Waters (D-Calif.) recently sponsored an administration discussion draft, the FHA Reform Act of 2010, which would amend the National Housing Act to:
- Give FHA the ability to increase annual mortgage insurance premiums from 0.50 percent to 1.50 percent;
- Give FHA additional authority to impose indemnification terms for mortgagees; and
- Give FHA additional authority to terminate mortgagee origination and underwriting approval.
Annual Mortgage Insurance Premium. The legislative proposal gives FHA the flexibility to increase the annual premium to 1.50 percent. Effective April 5, 2010, the upfront premium has been increased from 0.50 percent to 2.25 percent. However, FHA indicated it will reduce the upfront premium to 1.00 percent if FHA can offset this reduction by increasing the annual premium. Although the legislative proposal provides for an annual premium of up to 150 basis points, FHA has proposed an initial increase in the annual premium to 85 basis points for loans with loan-to-value ratios (LTV) up to and including 95% and to 90 basis points for LTVs above 95%.
FHA believes that the restructuring of mortgage insurance premiums will increase a borrower’s equity in their home. Borrowers typically finance the upfront premium, and a lower upfront premium will reduce the loan amount thereby adding equity in the home. In addition, FHA believes the proposed premium structure is more in line with GSE and private mortgage insurers’ pricing and enables more robust private competition.
Mortgagee Indemnification. FHA stepped up enforcement last year and remains focused on lender accountability. The proposal gives FHA the ability to hold all lenders to the same standards of accountability and to permit FHA to recoup losses through required indemnification for loans that were improperly originated or in which fraud or misrepresentation were involved. Currently, FHA has this authority for loans originated through the Lender Insured (LI) process. The LI process accounts for 70 percent of FHA loans, and 29 percent of FHA lenders. FHA is seeking to expand the indemnification requirements to include all Direct Endorsement (DE) lenders.
Termination of Mortgagee Origination and Underwriting Approval. The proposal also gives FHA additional authority in connection with terminating a mortgagee’s origination and underwriting approval. This additional authority would allow FHA to suspend a lender’s nationwide operations on the basis of the performance of one of the lender’s regional branches.
HECM Document Revisions
In Mortgagee Letter 2010-07 (March 1, 2010), FHA announced revisions to the model Home Equity Conversion Mortgage (HECM) Loan Agreement and the Fannie Mae 1009, Residential Application for Reverse Mortgages. This change is effective for all HECM case numbers assigned on or after August 1, 2010, although lenders may use the revised forms immediately.
Appraisals for REO Property
In Mortgagee Letter 2010-08 (March 8, 2010), FHA announced a change in the validity period for appraisals utilized to establish the listing price on HUD’s Real Estate Owned (REO) properties from the current six month validity period to 120 days. This change is effective for appraisals with an effective date on or after April 1, 2010, and is consistent with the validity periods for appraisals used for FHA-insured mortgages (see Mortgagee Letter 2009-30). If the buyer is financing the purchase with a FHA-insured mortgage, a valid HUD REO sales contract must be ratified within 120 days of the appraisal effective date or the mortgagee must order a new appraisal or an appraisal update (see Mortgagee Letter 2009-51).
Further, effective March 8, 2010, with the exception of 203(k) as-repaired appraisals, when a buyer is using FHA financing to purchase a HUD REO property, the appraisal that was utilized in determining the list price will remain effective for purposes of obtaining the FHA-insured mortgage. A second appraisal may not be ordered simply to support a purchase price that is higher than the value on the current appraisal, although a second appraisal can be ordered if there are material deficiencies with the current appraisal or the current appraisal will not be valid on the date of contract ratification.
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.