FHA Tightens Lending Standards…Finally
Ever since it was announced that the Federal Housing Administration (FHA) was dangerously close to insolvency, speculation has been building over what emergency steps the agency would take. The issue was/is particularly pertinent for anyone connected to the housing and mortgage markets, since the FHA now underwrites more than 30% of all new loans overall, and 50% in certain regions. In any event, the wait is now over, as the FHA has announced several changes to its underwriting standards.
I’ll continue to pontificate in a minute, but let me first report the actual changes. They are as follows:
• New borrowers will have to have a minimum credit score of 580 to qualify for a 3.5% down payment. Those with lower scores will have to make at least a 10% down payment. The average credit score of FHA-insured borrowers is 693.
• Allowable seller concessions will be reduced from 6% to 3% of the sale price. The change is intended to discourage inflated appraisals.
• Buyers will have to pay an upfront mortgage insurance premium of 2.25% of the total loan amount, up from 1.75% now. A $150,000 mortgage would require a payment of $3,375, or $750 more.
While the new rules are largely self-serving (i.e. to help the FHA mitigate against bankruptcy, and having to solicit funds from Congress), they should also help consumers. Those of you with credit scores in the low 500’s are probably rolling your eyes at this, given the higher down-payment requirements and insurance premiums. But bear with me.
As the housing crisis made painfully clear, there are some borrowers who simply shouldn’t be eligible for mortgages. While enabling every borrower to potentially obtain a mortgage and purchase a house seems altruistic, it is actually the opposite, since it threatens the viability of the entire system. This is not a political issue, but rather a practical issue. Given the high rates of default associated with FHA mortgages, the FHA has no choice but to tighten lending standards. Failure to do so would risk its very existence. Those that are depending on the FHA for their mortgage would certainly agree that more expensive government loans are better than no loans at all.
It seems that these new rules are also intended to punish lenders. (As if to make this point, the FHA revoked the licenses of a handful of lenders the day before it was scheduled to announce the tightening of lending standards). Even today, too many lenders abuse the FHA insurance system by underwriting loans to un-credit-worthy borrowers at no risk to themselves. Such borrowers, for better or worse, will now be barred from the process, and those that are still able to participate can expect to pay for that privilege.
It’s worth pointing out that this development represents a window into the future of the government’s role in the mortgage market. While it probably didn’t intend to do so, the FHA has signaled that this unprecedented era of government assistance for mortgage borrowers could be coming to an end. Going forward, some of these programs will apparently be expected to pay for themselves, rather than operate permanently in the red.
Speaking of which, what are Fannie and Freddie up to these days?
