On December 02. 2009 Secretary Shaun Donovan testified in front of House Committee on Financial Affairs on how it is going to protect the Federal Housing Administration with past, current and proposed FHA changes to keep FHA financial health in order. While these changes are of particular interest on what affect it will have on the Las Vegas Market, the truth of the matter is it will have a profound change for all.
FHA role as the loan program of choices is evident with this statistic that 75% all home purchases are first time home buyers and 50% of those first time home buyers are using the FHA Program. Secretary Donavon also pointed out that the first time buyers has helped in the critical role of stabilizing the market with REO and vacant property purchases and the communities these home are in. I have expressed this sentiment in previous blogs on the need for more purchase offers being accepted by banks for first time home buyers instead of of cash investors. Another statistic in 2008, 51% of all FHA loans issued were issued to African American and 45% were issued to Hispanics. Any proposed changes that might be in acted could affect the very minorities that are in need of this program.
Current problem with FHA:
In an actuarial study it was discovered that instead of the 2% secondary reserves mandated by Congress has fallen to .53% of the total insurance in force. If the secondary reserves are combined with the reserves held in Financing Account then FHA reserves are at 4.5% of total insurance in force. This 4.5% reserves is equivalent sum of $31 Billion in reserves and will cover any losses for the next 30 years.
FHA has been described as the next "Sub Prime" due to the rapid depletion of of its Secondary Reserves, but the sub prime market has a 240% higher default rate then FHA. Secretary Donovan also noted that previous management was lax on on monitoring and FHA had in place credit and risks assessments that were outdated and enforcement was weak.
Changes in place to date:
In 2008 Congress eliminated the "sellers assisted down payment program" due the high default rates for those that used this program to purchase a home. It should be noted that if these loans were taken out the secondary reserves would have been above the 2% required rate as reported by the Actuary study. This year enforcements were stepped up recently, including suspending 7 lenders, including Taylor, Bean, and Whitaker and withdrawal of FHA approval for 270 other lenders.
Enforcement and accountability will be required for all lenders for the origination quality and compliance of FHA requirements. This will also be extended to indemnify FHA when loans issued by the lender does not meet either of these conditions. FHA will be issuing a Lender Scorecard on its website to have transparency for its borrowers, market and lenders.
Other changes that are being proposed:
- Reduced Sellers Concessions from 6% to 3%.
- Change the no FICO score requirement to a required minimum FICO. (While no FICO score has been proposed by FHA most lenders have already set MID FICO to 620 and some lenders are requiring a 640 score.)
- FICO score requirement may require more down payment with lower scores.
- Down Payments may be increased to have the borrowers have more "skin in the game".
- Currently the up Front Mortgage Insurance is 1.75% of the loan amount but Congress has allowed FHA to raise this to 3%. This is another possibility that is on the table to increase the Secondary Reserves.
- Currently the annual premium for mortgage insurance is .55% of the loan amount and this is at it maximum limits. FHA is asking to raise this amount to offset any future losses.
While Fannie Mae and Freddie Mac have received $45 Billion of Tax Payers dollars to prop up these two privately held companies from defaulting, but Congress has seen fit that no such subsidy will be available to FHA.
It must be noted that this will require Congress approvals for all of the proposals that have been submitted to the committee of Financing. It was noted that proposal and any discussions would be made public by the end of January. We will see the final outcome and I will keep you updated on any changes that could affect your business.