The Real Story …
News and commentary about the real estate market and related topics.
Dave Parrish, ABR ®, CRSA, CSP, GRI, ePRO ®, REALTOR ®, RealtySouth
Buyers beware… FHA makes market adjustments…
The FHA (Federal Housing Authority) has taken on a major role in the housing market during the economic downturn. With as many as half of all new mortgage loans in some markets now being FHA insured loans, FHA loans have become the backbone for financing home purchases. FHA doesn’t lend money to home buyers, but instead insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront mortgage insurance premium (MIP), which can be rolled into the loan.
In October 2009, FHA announced that its capital reserve fund, the product of the MIP fees, had fallen below the congressionally mandated level. The value of the FHA’s reserves to cover losses had fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio. The drop in capital reserves has led Congress and the Administration to call for changes to strengthen FHA.
Therefore, on January 20, 2010, FHA announced major changes to ensure its long-term financial soundness. In doing so, FHA is trying to balance three fundamental objectives:
1) financial soundness of the FHA insurance fund – ensuring that its capital ratio returns above 2 %,
2) fulfilling its mission of serving borrowers not adequately served by the private sector, and
3) facilitating the recovery of the housing industry and the over-all economy.
The agency is set to raise the MIP fee from 1.75% to 2.25%, the second increase in the past two years. FHA will continue to allow the financing of the MIP fee into the mortgage loan. Note that If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.
While some housing analysts have pushed for higher down payments on FHA-backed loans, FHA will keep minimum down payments at the current 3.5% level for most borrowers. But the agency will require riskier borrowers with credit scores below 580 to make a minimum 10% down payment. While the FHA doesn’t have a credit-score cutoff, most lenders require a minimum 620 score. Note that there is a bill in Congress that would raise down payments to 5%, from the current 3.5%.
Instead, the FHA will reduce the amount of money that sellers can kick in for closing costs to 3% of the sale price, down from the current level of 6%. The higher cap led to abuses where sellers marked up the purchase price to cover the closing costs assistance.
Additionally, FHA will seek legislative authority to increase the cap for annual premium increases. Currently such increases are capped at .55 percent.
Finally, the FHA will also take a series of measures to boost its ability to oversee and take action against lenders that originate loans with FHA backing.
HUD (Department of Housing and Urban Development) says that the change in MIP will take place in the “Spring”. While the increased down payment for the low FICO score and the decrease in the seller concessions will take place in “Early Summer.”
As you can see at this point implementation dates are a bit fuzzy… however, it is clear that terms are more favorable for Buyers now than they will be in the near future… Buyers don’t forget about tax credit deadlines and the forecast of increases in mortgage interest rates this spring. I spoke last week about the proverbial bell. Looks like it may be ringing even louder! Don’t miss the favorable factors in place for buying a home prior to these changes.
