January 20th, 2010
03:55 PM ET
13 years ago

Harder to get an Uncle Sam mortgage

NEW YORK (CNNMoney.com) - It's going to be harder to get a government-backed mortgage from now on.

Looking to shore up its weakening finances, the Federal Housing Administration is set to announce stricter standards on Wednesday.

The agency, which insured nearly a third of new mortgages in 2009, will increase the premium it charges for its mortgage insurance and require those with weaker credit scores to come up with larger downpayments.

The FHA will also reduce the amount of money a seller can provide a homebuyer for closing costs, as well as tighten its enforcement of lenders.

"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. "Importantly, FHA will remain the largest source of home purchase financing for underserved communities."

FHA loans have skyrocketed in popularity during the mortgage crisis since the agency backstops banks if borrowers stop paying. But housing experts are growing increasingly concerned about the agency's ability to handle rising numbers of defaults.

In November, the agency reported that its reserve fund has dropped to .53% of its insurance guarantees, well below the 2% ratio mandated by Congress and the 3% ratio it had last fall. The fund covers losses on the mortgages the agency insures.

Federal housing officials, who took several steps to shore up the agency's finances last year, promised to do more at a congressional hearing in December. The new announcement is the latest set of changes to FHA policies.

FHA is making these changes in order to bring its reserve fund up back up to the 2% ratio, Stevens said in a conference call with reporters. However, the agency also wants to make sure that the new rules don't disrupt the housing market and don't hurt FHA's ability to assist the underserved.

The agency will increase its up-front mortgage insurance premium to 2.25%, from 1.75%. It will also ask Congress for the right to hike its ongoing premium, currently as much as .55% monthly. The agency will then shift some of the increase in the up-front premium to the ongoing charge.

Raising the premium is the best way to add to the reserve fund, Stevens said.

The move isn't likely to hurt borrowers much, said Thomas Lawler, founder of Lawler Economic & Housing Consulting. Most homebuyers will likely finance it so it will only bump up their monthly payments by a little.

"This doesn't increase the amount they need to bring to the closing table," Lawler said.

The FHA will also require borrowers to have at least a credit score of 580 to qualify for the agency's 3.5% downpayment program. Those with lower scores will have to pay at least 10%. However, this rule may have little practical effect since Stevens recently said the average borrower score is 693.

The new policy also will reduce the amount of money sellers can provide to homebuyers at closing to 3%, down from 6%, of the home's price. That change will bring the agency in line with industry standards and remove the incentive to inflate appraisals.

Finally, officials plan to clamp down on lenders offering FHA mortgages. The agency will more closely monitor their performance, as well as seek legislative authority to require mortgage firms to assume liability for all loans they originate and underwrite. It will also publicly report lender performance data.

One thing the agency did not do is to broadly increase the downpayment requirement. Many industry observers said such a step is necessary to reduce FHA loans' high delinquency rates. Borrowers with little equity in their homes are more likely to default or walk away.

The agency has seen a spike in delinquencies amid the mortgage meltdown. Some 14.36% of FHA loans were past due in the third quarter, according to the Mortgage Bankers Association. This compares to 9.64% of all loans.

"They are not addressing the fundamental issue - that FHA loans are too risky," said real estate finance consultant Edward Pinto, former chief credit officer for Fannie Mae in the late 1980s. Borrowers "need more skin in the game."

FHA did not increase minimum downpayments more broadly because its borrowers with credit scores above 580 were generally timely with their payments.

"The reason why we drew the line at 580 is that there are clear performance drop offs as you drop down credit score tiers," Stevens said.

As banks have clamped down on mortgage lending, the FHA program has emerged as one of the few ways people can buy a home.

Banks are more willing to make FHA loans because they come with a federal guarantee to cover losses if the borrower defaults. And borrowers can more easily qualify for FHA loans because they only need 3.5% down and can have lower credit scores.

As a result, demand for FHA loans has exploded. The agency guaranteed more than $360 billion in single-family mortgages in fiscal 2009, which ended Sept. 30, more than four times the volume in 2007.

The agency insured about 30% of home purchases and 20% of refinanced mortgages in 2009. Nearly 50% of first-time homebuyers go through the agency.

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soundoff (15 Responses)
  1. JGB

    It should be, we got into this mess because of Democratic beliefs that everyone has the right to home ownership....................nice idea, but lacks common sense that those mean old republicans think you should be able to afford your house payment. Owning a home is a privilege you work for, not a right that is handed to you................Geez, will these Democrats ever wake up and let people support themselves?

    January 20, 2010 04:56 pm at 4:56 pm |
  2. seebofubar

    GOOD..it was too easy to get a loan. The pressure from the left wing liberals to give loans to minorities with questionable means was the cause of this economic debockle. Home ownership is a privelage, not a right!

    January 20, 2010 05:12 pm at 5:12 pm |
  3. JD

    As if! I've been upside-down on my mortgage since 2008 and each time I've sought to get a re-finance to a lower interest rate, the banks brushed me off, even with a perfect credit score.

    To make matters worse, all I've been told since 0bama got into office is that I have to work harder to pay EVERYONE ELSE'S mortgage!

    Don't act like this is a sudden or recent development, CNN. It's been this way for years now.

    January 20, 2010 05:22 pm at 5:22 pm |
  4. Dar

    I thought Odumbo told the bankers to start lending again, didnt he?
    I guess that doesnt count for his adminisration, what a tool this president has turned out to be. lie lie lie

    2010/2012 REAL Change is coming

    January 20, 2010 05:22 pm at 5:22 pm |
  5. Dodd Democrat...

    With the banks not lending and making it harder for Homeowners, the last thing we need is for the Government to do the same.

    This is when WE NEED FHA to step in and help, not walk away.

    January 20, 2010 05:33 pm at 5:33 pm |
  6. B.S.

    THANK YOU! Now, if we'd just take the next logical step and disband the FHA/Freddie/Fannie and get the government out of the subsidizing house prices racket, maybe the market will finish correcting and finally stabilize.

    But since we'll NEVER get rid of these stupid programs, at least we can get them to tighten the standards. 20% down should be the BARE MINIMUM acceptable. 3% down is sheer folly.

    January 20, 2010 06:09 pm at 6:09 pm |
  7. Sue

    Well, does Obama have a mortgage? Bet his house is PAID for with OUR $$$, while it sits VACANT> How many vacations will he take before he visits his own (FREE) home.

    January 20, 2010 06:16 pm at 6:16 pm |
  8. Dex, Houston TX

    Trust me, Uncle Sam's mortgage loans are harder to get than a bank loan, so this is not news. From what I have gathered the government is NOT making it harder to get a loan...they are making the guidelines sensible, there is a big difference.

    January 20, 2010 06:20 pm at 6:20 pm |
  9. Here's the real GOP

    I'm in the mortgage industry. If FHA doesn't lower their risk then they'll eventually become insolvent. If that happens then who will help the underserved homeowners? FHA needs to increase the upfront mortgage insurance premium to keep their piggy bank, reserve fund, at the level congress tells them too. And they're right, the more the borrower has to put into the purchase the less likely they are of walking away.

    The fact that FHA is changing the rules has nothing to do with the current President. It has everything to do with the current housing market. The market today and the market over the last 3 years. And you can blame that on Bush and the Republicans. These changes are only a reaction to the mess the Bush administration left us with.

    And the housing market collapse doesn't have anything to do with liberals wanting low income people to buy houses. It had to do with the Bush admin not monitoring lending practices in which lenders created sub-prime arms to low credit score borrowers. These products were created under Bush and Republican control. And it was these products that brought down the housing market. Had they only been given 30 year fixed mortgages we wouldn't be in near the mess we are today. Write that one down.

    Keep up the good work Obama!

    January 20, 2010 06:36 pm at 6:36 pm |
  10. obama the liar

    so sad that they ran out of all of that free OBAMA money.

    January 20, 2010 06:36 pm at 6:36 pm |
  11. Objective Thinking

    I mean absolutely no offense to liberals, but lending to people that banks would normally consider a credit risk is a bad practice. Yes, such practices are aimed at giving middle-to-lower-middle class families a chance they would otherwise not get–which is a noble intention.

    But noble intentions don't mean good results, and the result is that when the credit-risky households can't pay their mortgages, we have foreclosures and short sales, which affect equity for surrounding homes.

    The housing market would have been better had we not had government help, because what goes up, must come down.

    January 20, 2010 07:00 pm at 7:00 pm |
  12. Four and The Door

    But housing experts are growing increasingly concerned about the agency's ability to handle rising numbers of defaults.
    Is anyone surprised? Really. How does anyone expect that this would not be the end result? The new liberal government got way too involved with this industry and in the end it inevitably means that taxpayers get bitten again. Our country's resources are not being managed. They are being ravaged.

    January 20, 2010 07:14 pm at 7:14 pm |
  13. Hammerer

    You are not saying that the freeloaders will be expected to pay their loans.

    January 20, 2010 07:30 pm at 7:30 pm |
  14. aj

    Minorities weren't the problem for the finance debacle. It was the rich and powerul. Learn what the facts before making comments. The rich gambled buying homes thinking they could flip them. Goldman Sachs bundle the loans, good, avg, marginal credit and sold it.They then betted against it, that they wouldn't pay the mortgage. They won both ways, got money for selling the bundle and govt money when it fell. WOW learn the system and the govt will make you rich with no regulations. 80% of forclosures are from 700 plus credit worthy people. The blame and fault are those not the minorities who were giving loans with arms and told they could refinance knowing they couldn't. Sad they were taken advantage of because of ignorance. That doesn't erase the fact that the rich, powerful and Washington caused and let this happen.

    January 20, 2010 07:38 pm at 7:38 pm |
  15. Scott, Tucson

    This is like closing the barn door after the animals got out. Remember it was the Bush administration that was trying to rein in the free wheeling and dealing Fannie Mae and Freddie Mac from giving out loans to people who could not afford them thanks to the likes of Barney Frank, Chris Dodd and other DEMOCRATS. This was the start of the economic mess we're in now.

    January 20, 2010 08:22 pm at 8:22 pm |