January 20, 2010 / 5:42 PM / 10 years ago

Q+A-What changes on horizon for FHA backed mortgages?

WASHINGTON, Jan 20 (Reuters) - The U.S. Federal Housing Administration said late Tuesday it was increasing borrowing costs for homeowners getting loans backed by the government in an effort to shore up the agency’s finances and avoid a taxpayer bailout. The FHA said it would increase the up-front mortgage insurance premium, which is paid by the borrower when the loan is made, to 2.25 percent from 1.75 percent. And it would raise the minimum down payment required to secure an FHA-backed mortgage for less creditworthy borrowers.

Why is the FHA making this move?

In late 2009, an independent auditor found that the FHA’s capital reserves were below the 2 percent required by Congress. In fact, the FHA has capital reserves equal to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures. So, the agency is trying to increase the quality of its borrowers in order to reduce the number of loans that end up in default. But it doesn’t want to seriously impact the ability of borrowers to get FHA-backed loans, which now make up half the market. So it is tweaking the rules around the edges.

What does the FHA decision to raise borrowing costs mean?

The biggest immediate change is the increase in the up-front mortgage insurance premium. For a loan of $100,000, the mortgage insurance premium would be $2,250, up from the current $1,750. A $500,000 loan would therefore be $11,250 instead of $8,750. Those fees can be rolled into the loan. 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. That’s designed as a counterweight to inflated house prices stemming from borrowers just tacking on the closing costs to the purchase price of a home. FHA is also asking Congress to increase its second premium, the so-called annual premium which is paid over the life of the loan. FHA Commissioner David Stevens said the FHA plans to lower the upfront premium after it gets approval to raise the annual premium, currently capped at 0.55 percent of the loan amount.

How many borrowers will be affected by this decision?

Stevens told reporters on Wednesday that he couldn’t answer that question. And some analysts say that’s because it’s almost none. The FHA is raising its minimum credit score for a 3.5 percent down payment to 580 while scores below that level would be required to have 10 percent down. But most FHA lenders won’t lend to anyone below 620 so it’s unclear how many borrowers would really be affected by the down payment change. And the other changes might cause some borrowers on the margins to be unable to get loans as a result of increased up-front costs but most borrowers will just have to scrape up the extra cash. FHA says that’s by design. The FHA faced some pressure to raise the down payment minimum to 5 percent, but FHA says that would go against the agency’s mandate to bolster housing finance for needy borrowers.

David Berenbaum, chief program officer at the National Community Revinvestment Coalition said the FHA has a difficult task of navigating its competing goals. “The burden to the individual borrower is modest and should ensure, overall, that borrowers have access to responsible credit,” he said.

Reporting by Corbett B. Daly; Editing by W Simon

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