PARAMOUNT MORTGAGE - LENDER'S BLOG

WASHINGTON, Reuters  - The U.S. Federal Housing Administration (FHA) said on Tuesday it will raise the minimum down payment required to secure an FHA-backed mortgage for less creditworthy borrowers as part of a series of steps to shore up the agency's finances.

The FHA said borrowers with credit rating scores below 580 would be required to make a down payment of at least 10 percent, while the rate for higher-ranked borrowers would stay at the current 3.5 percent. The target for implementation of this rule is early summer.

The agency also said it would increase the up-front mortgage insurance premium (UFMIP) to 2.25 percent from 1.75 percent on April 5th. These policy changes were deemed prudent by the agency to ensure its financial health and carry on the mission of supporting home ownership.

"Striking the right balance between managing the FHA's risk, continuing to provide access to underserved communities, and supporting the nation's economic recovery is critically important," FHA Commissioner David Stevens said in a statement.

The FHA said in November that its capital reserves had dwindled to just 0.53 percent of the value of the thousands of home mortgages it insures, well below the 2.0 percent required by law and down sharply from 3.0 percent in 2008.

To help rebuild reserves, the agency said it would seek congressional approval to allow it to raise annual mortgage insurance premiums - which are paid out by the borrower over the life of the loan - above the present maximum of 0.55 percent.

If approved, this would allow it to shift some of the increase in the UFMIP premium to the annual premium. This would help reduce the amount of cash a borrower would need at closing.

"This shift will allow for the agency's capital reserves to increase with less impact to the consumer, because the annual premium is paid over the life of the loan instead of at the time of closing," continued Stevens.

The agency will release the new proposed annual insurance premium this week.

The FHA also said it was cutting the amount of aid sellers could provide buyers to 3 percent of the purchase price from 6 percent; a move it said could help lessen incentives to inflate appraised home values. The target to implement this rule is early summer.

These changes will be in addition to tighter oversight of FHA lenders. The agency saw a fall in volume during the height of the financial boom in 2007 as Wall Street investment banks offered lenders a lucrative market for their loans. Agency volume has soared since mid-2007 as lending standards tightened and easy access to capital dried up.

Applications for FHA-guaranteed mortgages exceeded an annual rate of 3 million in October; nearly triple the level in 2007. In 2006, when subprime and other Wall Street programs were at full speed, the annual rate for applications was less than 600,000.

Link: FHA Rules