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FHA OUTLINES CHANGES TO MANAGE RISK, LAWMAKERS EXPLORE REFORM IDEAS Keeping her promise to Sen. Bob Corker (R-Tennessee), Federal Housing Administration (FHA) Commissioner Carol Galante announced January 30 a series of changes that she says will allow the agency to better manage risk and strengthen its anemic Mutual Mortgage Insurance (MMI) Fund. ���In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers,��� Galante said. The first major change���effective for FHA case numbers assigned on or after April 1 of this year���is the consolidation of FHA���s Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) and Saver Fixed Rate HECM pricing options. Because the standard pricing option represents a majority of the loans insured through the HECM program, it is responsible for much of the significant stress on the MMI fund, FHA said. To help sustain the reverse mortgage program, the HECM Fixed Rate Saver will be the only pricing option available to borrowers seeking a fixed-rate mortgage, thereby lowering upfront closing costs while permitting a smaller payout. In addition, the agency plans to increase its annual mortgage insurance premium (MIP) by 0.1 percent for most new mortgages and by 0.05 percent for jumbo loans. The premium increases exclude certain streamline refinance transactions. FHA will also require most of its borrowers to continue paying annual premiums for the life of their mortgage loans. The agency previously canceled annual MIP on loans when the 44 outstanding principal balance reached 78 percent of the original principal. FHA���s Office of Risk Management and Regulatory Affairs estimates the MMI Fund has foregone billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy. Other changes announced by Galante include a requirement for manual underwriting on loans with credit scores below 620 and debt-to-income (DTI) ratios above 43 percent and a higher down payment requirement for loans above $625,500, the conforming limit for loans in high-cost areas. FHA says it will also step up enforcement efforts for FHA-approved lenders with regard to aggressive marketing to borrowers with previous foreclosures. Borrowers are currently able to access FHA-insured financing three years after experiencing a foreclosure, but only if they have re-established good credit and qualify under the agency���s underwriting requirements. ���It has come to FHA���s attention that a few lenders are inappropriately advertising and soliciting borrowers with the false pretense that they can somehow ���automatically��� qualify for an FHA-insured mortgage three years after their foreclosure,��� the agency said. ���This is simply not true and such misleading advertising will not be tolerated.��� Just one week after FHA Commissioner Galante���s announcement, the House Financial Services Committee called on industry experts to discuss FHA���s role in the housing market and possible reforms. When Rep. Lynn Westmoreland (R-Georgia) posed the question of whether FHA would be permitted to function in the private market, Edward Pinto, resident fellow at the American Enterprise Institute and a former Fannie Mae executive, was quick to respond, ���Without government guarantee, FHA would be shut down by every state in the country based on capital requirements.��� In his testimony, Pinto argued, ���FHA���s lending practices are inconsistent with its mission and represent a disservice to American working-class families.��� Pinto says about 40 percent of FHA loans have at least one subprime characteristic. Either the borrower���s FICO score is below 660 or the loan has a debt ratio of at least 50 percent. ���A substantial portion of these loans have an expected failure rate exceeding 10 percent,��� Pinto said. While some argue FHA should reduce its median FICO score from 700 to 660 to assist borrowers who would otherwise not be able to obtain a mortgage, Pinto argues this ���higher level of risk-layered loans will result in a substantial increase in expected foreclosure rate.��� Anthony B. Sanders, senior scholar at George Mason University, largely shared Pinto���s views and sees problems with FHA���s current policies. While the GSEs have reduced their conforming loan limits, the FHA increased its conforming loan limit to $729,750, he noted. ���When this artificially high conforming loan limit is combined with FHA���s high loan-to-value (LTV) and low credit score policies, we have a recipe for inordinate harm to fragile households,��� Sanders said. Sanders recommended FHA require minimum FICO scores of 660, maximum LTVs of 95 percent, and maximum debt-to-income ratios of 31 percent on all loans it insures. Loans with lower FICO scores should require a 10 percent down payment, Sanders said. Julia Gordon, director of housing finance and policy at the Center for American Progress Action Fund, was the FHA���s most steadfast defender during the hearing. Gordon said without the FHA, home construction would have decreased 60 percent more than it did during the crisis, and home prices would have fallen an additional 25 percent, resulting in the loss of 3 million more jobs. ���Critics claim that FHA���s basic business model is flawed. For evidence, they point to a concentration of lending in areas where default rates are high,��� Gordon said. ���This criticism is essentially blaming the fireman for getting the house wet.��� STAT INSIGHT 2.52 Million Loans past due 60 or more days at the end of 2012. Source: HOPE NOW

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