Editor’s note: After this story was written, Sen. Bob Corker announced that the Federal Housing Administration has committed to several changes to FHA mortgage programs. In return, Corker says he will support Acting FHA Commissioner Carol J. Galante’s nomination to be FHA commissioner (see Inman News story).
Corker released a letter from Galante, who promised FHA would “move on” several policy changes by Jan. 31, 2013:
- Increase underwriting criteria for borrowers with FICO scores between 580 and 620 by establishing a maximum debt-to-income ratio.
- Increase the down payment requirement and the insurance pricing for loans between $625,000 and $729,000 to protect FHA against loss on high balance loans that are outside Fannie and Freddie conforming loan limits and scale back the government’s footprint in the housing market.
- Place a moratorium on the full drawdown reverse mortgage program to assess its viability after $2.8 billion in losses.
In her letter to Corker, a Tennessee Republican, Galante said FHA is finalizing a letter to lenders that will require borrowers with FICO scores below 620 to have a total debt-to-income ratio of no more than 43 percent to be eligible for processing through FHA’s automated underwriting system, TOTAL Scorecard. Borrowers with DTIs exceeding 43 percent will have to be processed manually, with lenders documenting compensating factors such as a larger down payment or higher level of reserves.
Galante said FHA will raise the minimum down payment on loans between $625,500 to $729,000 from 3.5 percent to 5 percent. Since June, FHA has been pricing mortgage insurance premiums for loans in that range at 150 basis points, instead of 125 basis points. Another premium increase announced in November will raise the premiums to 155 basis points — the maximum currently allowed by law.
The combination of higher down payment requirements and increased mortgage insurance premiums is aimed at scaling back the FHA’s market share of those loans.
The original story appears below:
Imagine the implications for housing markets if any of the following changes to FHA mortgage programs were made in the months ahead:
- Minimum FICO scores for new applicants get raised to 620 from the current 580 for all borrowers.
- Maximum loan limits in high-cost areas are reduced to $625,500 from the current $729,750, or limits are cut to pre-recession levels across the board.
- The entire reverse mortgage (“HECM”) program, which dominates the U.S. market, is shut down for two years.
- A minimum 20 percent down payment is required for anyone seeking an FHA loan within seven years of a foreclosure. Today the standard is three years following foreclosure to qualify for a new loan with a 3.5 percent down payment.
You might assume that drastic changes like these would be long shots under the current administration, but think again. More than a few eyebrows were raised when HUD Secretary Shaun Donovan told a Senate committee hearing earlier this month that he was either already considering each of these options, or at least open to doing so.
Huh? Haven’t two consecutive heads of FHA — former Commissioner David Stevens and Acting Commissioner Carol J. Galante — defended the 580 FICO limit for low down payment borrowers, and in fact urged lenders to be more open to such applicants, especially those whose low scores are attributable to recession-era job losses and other unforeseen economic jolts?
Absolutely. So it was a bit of a surprise to hear Donovan tell Sen. Bob Corker (R-Tenn.) that raising the FICO minimum “is something we are actually looking at. I think it is likely that we take additional steps” on scores as the Obama administration puts together its upcoming budget. “I agree that we need to be looking at perhaps adjusting on the FICO side.”
Donovan also told Corker that FHA is “working on changes” to the three-year minimum time period before applicants who had been foreclosed upon could obtain an FHA loan.
On loan limits, he said he’s in total agreement with Corker that they should be lowered, scaling back FHA’s maximums to where they were before the first economic stimulus legislation passed in 2008.
As to the Home Equity Conversion Mortgage (HECM) reverse mortgage program, Donovan stopped short of endorsing a moratorium on new loans, but said “we do believe we need to make changes” in the program. “We could … create a moratorium,” he said, but only at the cost of “eliminating an option for some seniors” who need to pull cash from their homes.
Following the hearing, HUD officials declined to elaborate further on Donovan’s remarks or on any immediate plans for FHA policy changes. In fairness, Donovan qualified several of his remarks during the hearing.
On FICO scores, he said that the agency continues to believe that some lenders have “overcorrected” in their underwriting by placing high “overlays” — extra fees — on FHA borrowers with scores below the lenders’ own requirements, which tend to be 40 to 60 points higher than FHA’s minimum.
On the issue of the post-foreclosure wait period, he added that what’s needed most is clearer criteria on which applicants represent low risks to the agency, and therefore should qualify for the three-year minimum, and those who represent higher risks. “I would agree that our (current) standards are not clear enough” to accomplish this, Donovan said.
Regarding the HECM program, Donovan also noted that his preference would be to make structural changes that would limit future insurance fund losses, rather than totally shutting it down through a two-year moratorium. In the recent annual independent actuarial report on FHA’s financial status, reverse mortgages accounted for an outside $2.8 billion of the agency’s $16 trillion-plus projected shortfall in reserves.
So what are we to make of Donovan’s remarks to the Senate banking committee? Is FHA pursuing some of this stuff for 2013? Or are other factors at work here behind the scenes?
It’s definitely more of the latter than the former.
HUD has been waiting all year for Congress to pass legislation called the FHA Emergency Fiscal Solvency Act of 2012 (HR 4264), a bill that would give the agency more latitude to raise premiums when loan vintages go sour, strengthen its ability to claw back money from lenders who don’t follow underwriting guidelines, and give it other powers HUD feels it needs to reduce losses and raise reserves.
The House passed the bill in September with strong bipartisan majorities, but the Senate hasn’t taken action. If it doesn’t, the bill dies Dec. 31 at the end of the current congressional session. The Senate also hasn’t voted on the long-pending nomination of Galante to be the FHA commissioner. Donovan badly wants both.
But Republican hardliners in the Senate, including Corker, think the House-passed FHA bill doesn’t go far enough, and they potentially stand in the way of its enactment during the remaining days of this month. Corker has sponsored an amendment calling for a 620 FICO minimum, a two-year reverse mortgage shutdown, lower loan limits and 20 percent down payments for mortgage applicants who experienced a foreclosure during the preceding seven years.
Senate Banking Committee Chairman Tim Johnson (D-S.D.), on the other hand, wants to rush the FHA bill to a floor vote without amendments, which would preclude consideration of the Corker amendment. That’s why the colloquy he had with Donovan might open the door both to passage of the FHA reforms, plus an understanding that HUD would take a hard look at Corker’s proposed changes in 2013.
How all this works out is still up in the air. The Senate is preoccupied with weighty end-of-the-year battles over the “fiscal cliff” and other issues. Sen. Johnson may not be able to rush the bill to the floor without amendments.
But one way or the other, Donovan’s on-the-record public agreements to “work with” Corker and the Republicans on credit scores, loan limits, HECMs and down payments post-foreclosure could have important impacts on FHA customers in 2013 and beyond.