In a letter to Sen. Bob Corker (R-TN), acting FHA Commissioner Carol J. Galante outlined four major areas where the FHA is likely to evolve.
CreditFirst, Galante wants to make it tougher for borrowers with weak credit to get FHA financing. She says credit scores at 620 and below will still be acceptable, but lenders will have to manually underwrite such loans if the borrower's debt-to-income ratio exceeds 43%. Such a proposal, says Galante, would reduce claims against the FHA from such borrowers by roughly 20%.
Sounds tough, but borrowers with weak credit already face tough scrutiny. According to HUD, qualifying ratios for those with insufficient credit “may not exceed 31 percent for the payment-to-income ratio and 43 percent for the total debt-to-income ratio. Compensating factors are not applicable for borrowers with insufficient credit references.”
One result of tighter standards is that during the past few years FHA loans to individuals with credit scores below 640 have plummeted (from over 60 percent of originations between October and December 2008 to less than ten percent between July and September 2012), so this proposal merely continues a trend.
Reverse MortgagesSecond, Galante wants to end FHA insurance for “standard” fixed-rate reverse mortgages. This product is available to qualified owners aged 62 and older, but such loans have generated huge FHA losses (estimated at $2.8 b) during the recent period of falling home values. An end to this product would substantially reduce reverse loan volume, meaning this is a real transformation. The remaining program, HECM Saver, is a lower-cost option with lower borrowing limits.
Galante also says that in the future, HUD may require closer financial assessments for reverse-mortgage borrowers and require the use of escrow accounts so that money for taxes and insurance can be set aside each month. These too would be genuine changes.
A huge attraction of reverse mortgage financing is that there is no monthly requirement to pay mortgage interest or principal. The loan need not be repaid until the borrower sells, moves or drops dead. However, borrowers remain responsible for the ongoing payment of insurance and local property taxes. This is a problem because if tax payments are not made, the property can be foreclosed, and if insurance coverage is not continued then the borrower is violating the loan terms.
As taxes and insurance have to be paid anyway, the idea of monthly collections for these items is likely to be adopted for reverse mortgages originated in 2013.
Down PaymentsThird, Congress requires the FHA to insure loans for as much as $729,750 for single-family homes in high-cost areas. This compares with a $625,500 cap in 2013 for conventional loans under Fannie Mae and Freddie Mac guidelines. (The VA loan limit -- under the “Honoring America's Veterans and Caring for Camp Lejeune Families Act of 2012 which was passed last August -- will be $729,750 through 2014.)
The need for big FHA loans is miniscule: the proportion of FHA loans above $500,000 is less than 1%.
Galante says she wants to increase the required down payment for any loan amount above $625,500 from 3.5% to a full 5%. This is a huge down payment increase for larger loans and a way to discourage the use of FHA insurance for bigger purchases. Count this as a big change.
ForeclosureFourth, Galante says borrowers must wait at least three years after a foreclosure to get a new FHA mortgage, and only then if they have re-established good credit and can provide a fully-documented loan application. In essence, basic FHA policies would remain unchanged.
What concerns Galante are ads which suggest that FHA financing is “automatically” available three years after a foreclosure. That is not the case and Galante wants to crack down on misleading ads. Approval is not automatic for any FHA borrower because all new loans must be fully documented and carefully underwritten.
However, more ad scrutiny is hardly new. Back in 2007, the Federal Reserve proposed rules that would “prohibit seven misleading or deceptive practices in advertisements for closed-end mortgages.”
Oh well; if Saturday Night Live can have “encore” presentations, why not the government?