PARAMOUNT MORTGAGE - LENDER'S BLOG

FHA Ready to Reduce Seller Concessions

HUD is preparing to implement a few new policies that will no doubt affect borrowers utilizing FHA's guaranteed loan program.

The rule changes entered the public comment phase last week which will end on August 16. Implementation of the policies would occur thereafter.

These FHA proposed changes are part of FHA's overall strategy to "strengthen their capital reserves" and include:

1. Reducing allowable seller concessions from six to three percent.
2. Updating credit and down payment requirements for new borrowers.
3. Tightening underwriting standards for manually underwritten loans.

FHA faced the results of an audit in late 2009 which showed that the capital ratio of its Mutual Mortgage Insurance Fund (MMIF) had fallen below its statutorily mandated 2% threshold.

In a concerted effort to reduce its risk exposure in the last few months the Administration has raised premiums on its FHA insurance, prohibited seller-financed down payment assistance, stepped up enforcement of its regulations, tightened appraisal rules, banned several lenders from writing FHA guaranteed loans and brought suits against others.

FHA said it is also "concerned with the issue of layering risk" when qualifying borrowers for loans.  According to the FHA, "The chance of default is compounded in loans where there are low credit scores, high loan-to-value ratios, high debt-to-income ratios, and low or zero cash reserves associated with a loan."

The first new rule reducing seller concessions will bring FHA in line with the guidelines of most conventional lenders.  FHA said it has found that borrowers who had been allowed to "take concessions above 3 percent had a significantly higher risk of losing their homes." 

For example, loans written in 2008 with no concessions had a claim rate against the FHA guarantee of 1 percent. Seller concessions up to 3 percent had a rate of 1.2 percent while those loans with concessions above 3 percent had a claim rate of 1.7 percent.

FHA has required that seller concessions to borrowers in excess of six percent be treated as an "inducement to purchase" and that the FHA mortgage amount be reduced accordingly.  The new rule would reduce the allowed concession to 3 percent, with the permitted mortgage amount reduced dollar for dollar where concessions are given above that level. 

The second proposed rule, which in part requires a minimum FICO of 580 to qualify, will affect few borrowers since lenders primarily use higher qualifying scores.

The third proposed change outlines the compensating factors which can be used by lenders when manually underwriting borrowers with non-traditional credit.

The reliance on FHA guaranteed loan programs is shown in their increase of market share which has jumped from 3% in 2007, representing $57 billion in insurance written, to a high of 30% in 2009 with more than $300 billion written.