FHA under pressure to reduce insurance claims, build reserves
3/11/2012WASHINGTON -- For anyone considering buying a house with an FHA mortgage and expecting the seller to help out with your closing costs, here's a heads-up: the FHA plans to impose significant restrictions on the amount sellers can contribute at settlements.
On top of that, FHA will raise its mortgage insurance premiums during the coming weeks.
Over the past six years, FHA has offered down payments as low as 3.5 percent despite the recession and housing bust, increasing its market share 25 percent-plus from 3 percent. The program is now financing 40 percent or more of all new-home purchases in some metropolitan areas and is a crucial resource for first-time buyers and moderate-income families, especially minorities.
But during the same span of rapid growth, FHA's insurance-fund capital reserves have deteriorated steadily -- far below congressionally mandated levels. Delinquencies have been increasing. According to the latest quarterly survey by the Mortgage Bankers Association, FHA delinquencies rose to 12.4 percent compared with a 4.1 percent average for prime (Fannie Mae-Freddie Mac) conventional fixed-rate mortgages and 6.6 percent for VA loans.
As a result, FHA is under the gun -- from Congress and from within the Obama Administration -- to cut insurance claims and rebuild its reserves.
FHA allows sellers to pay up to 6 percent of the price of the house toward their buyers' settlement expenses. Fannie Mae and Freddie Mac, by comparison, cap contributions at 3 percent. VA's ceiling is 4 percent.
Under newly proposed rules, the FHA cap would drop to the greater of 3 percent of the house price or $6,000.
In sales involving houses priced at $100,000 or below, this wouldn't change anything ($6,000 equals 6 percent of $100,000). But on all sales above this threshold, the squeeze would get progressively tighter.
On a $200,000 house, a buyer could today ask the seller to pay for $12,000 of a long list of settlement charges including all prepaid loan expenses, discount points on the loan, interest rate buy-downs, and upfront FHA insurance premiums, among others. Under the proposed cutback, the maximum amount would be slashed in half.
The proposed cuts are open to public comment through the end of this month but are highly likely to be adopted in much the same form soon afterward. FHA also is restricting the types of "closing costs" that sellers can pay. Six months' or a year's worth of interest payments or homeowner association dues in advance no longer will be permitted -- a serious blow to many builders who use these as financial carrots.
Beyond these changes, FHA plans significant increases in insurance premiums -- to 1.75 percent on its upfront premiums, up from 1 percent, effective April 1, and annual premiums up by 0.1 percent on all loans under $625,000 and by 0.35 percent on mortgage amounts above that, effective June 1.
William McCue, president of McCue Mortgage Co. in New Britain, Conn., which does a sizable percentage of its business with FHA, said the cumulative impact of all these increases "will not just crowd first-time buyers out of the FHA market. It will prevent them from owning a home that absent these new costs would be affordable."