December 2, 2009 / 10:12 PM / 10 years ago

UPDATE 2-US says taking steps mend housing agency finances

(Recasts, adds background)

By Lucia Mutikani

WASHINGTON, Dec 2 (Reuters) - The Obama administration on Wednesday proposed tightening terms on mortgages guaranteed by the Federal Housing Administration, an effort to bolster the agency’s finances that could cool an already weak housing market.

U.S. Housing and Urban Development Secretary Shan Donovan asked Congress for authority to raise borrower premiums and downpayments as a way to bring the FHA’s depleted reserves back up above a congressionally mandated 2.0 percent minimum.

“We have made the decision to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan, to make sure that FHA borrowers have more ‘skin in the game’ and a stronger equity position in their loans,” Donovan told the House Committee on Financial Services.

In addition, the administration wants lenders to assume responsibility for any losses associated with loans not underwritten to FHA standards and to be held accountable for their origination quality and compliance with the agency’s policies.

However, there are concerns that the proposed stringent measures could derail the housing market’s nascent recovery.

“What would cripple the housing market is the FHA changes its down payment requirement,” said Rodney Anderson, a broker with Supreme Lending in Plano, Texas, and the top individual originator of FHA loans in the country.

“If you start telling people that they are going to have to put down more money, they are going to struggle with it.”

But Donovan said he did not believe the steps would have a negative effect on the housing market.

“We are contributing substantially to the recovery in the housing market and any of these changes that we will make, we will be very careful about potential negative impact on the market,” he told reporters.

“There is a balance we have to strike between making credit available and ensuring we are doing it in a responsible way.”

RISING IMPORTANCE

The proposal comes at a time when the FHA credit has never been more important to the U.S. housing sector. Mortgage credit for many Americans dried up when the domestic housing boom went bust in 2007, touching off the biggest financial crisis in 70 years.

The agency saw a fall in volume during the housing boom as Wall Street investment banks offered lenders a lucrative market for their loans, but 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.

The implementation of the measures would vary depending on the nature of changes being made, Donovan said. No determination had been made on how much to raise the annual insurance premium.

“Our current up-front premium of 1.75 percent is below the statutory cap of 3 percent, while the annual premium is currently at the statutory maximum,” he said.

An independent actuarial study last month found the FHA had capital reserves equal to 0.53 percent of the value of thousands of outstanding U.S. home mortgages it insures — down sharply from last year’s 3.0 percent.

“The actuary projects that even with growing volumes, more than 71 percent of FHA’s losses over the next five years will come from loans already on our existing books,” Donovan said.

“That’s why an important step we can take to minimize losses to capital reserves in the near term is to step up enforcement and make lenders more accountable.”

Other measures being proposed include a scorecard for lenders who do business with the housing agency. The FHA will also expand enforcement for new loans.

In addition to stepping up enforcement and accountability, steps were also being taken to reduce the maximum permissible seller concession to 3.0 percent from 6.0 percent.

“This is in line with industry norms and we will continue to consider additional reductions,” he said. “The current level exposes the FHA to excess risk by creating incentives to inflate appraised value.”

He said it was important to remember that the increased role that the FHA was assuming was a temporary measure aimed at ensuring that mortgage finance remained available until private capital returned. (Additional reporting by Al Yoon in New York) ((lucia.mutikani@thomsonreuters.com: +1-202-898-8315; Reuters Messaging: lucia.mutikani.reuters.com@reuters.net))

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