By Alan Zibel, ASSOCIATED PRESS, 1/20/2010

http://www.statesman.com/business/federal-mortgage-insurer-to-tighten-lending-standards-186741.html   

The Federal Housing Administration is raising fees and tightening lending standards to shore up its strapped finances and avoid a taxpayer bailout. 

The government agency has seen its losses rise with the foreclosure rate. Its reserves have sunk below the minimum level required by Congress. 

A healthy FHA is vital for the housing market because it insures roughly 30 percent of new loans and is the largest backer of mortgages to first-time buyers. 

[HOT: Has the FHA become the new AIG? Who will regulate it? Like AIG, the FHA insures loans to people who can’t always afford to make their payments. By September 2009, FHA insured 40% of all new home mortgages – about $750 Billion – and about 14% of them are now past due. Note the conflict between the 30% figure this reporter used (likely pulled directly from the FHA’s press release with no fact check) and the 40% figure we use (from the Mortgage Bankers Association). See also: Why the Housing Stimulus and FHA, Fannie Mae and Freddie Mac loan guarantees put Taxpayers (and the economy) at Risk.] 

The changes, which will go into effect in the first half of the year, "are among the most significant steps to address risk in the agency's history," FHA Commissioner David Stevens said in a statement. 

The FHA does not make loans; rather, the agency offers insurance against default. Borrowers are willing to pay for the insurance because FHA loans require down payments of only 3.5 percent of the purchase price, a rate that isn't changing. 

[HOT: The USDA Home Loan Program now guarantees rural home loans with zero-down (i.e. high risk since there’s no skin in the game). It’s aimed at low and very-low income families and is often combined with the $8,000 homebuyer tax credit (free money) to entice vulnerable first-time buyers.] 

The new policies to be announced today are designed to bring more revenue into the agency, while at the same time keeping loans available. 

Under the changes, homebuyers will: 

•         Pay an upfront mortgage insurance premium of 2.25 percent of the total loan amount, up from the current level of 1.75 percent. A borrower taking out a $200,000 mortgage would pay a $4,500 fee, for example, rather than the current fee of $3,500. Borrowers will still be able to wrap these fees into the total amount borrowed. FHA officials also plan to ask Congress to increase the maximum annual premium that FHA can charge.
[HOT: So bank loans require 15-20% down, but loans insured by FHA (i.e. taxpayers) need only 3.5% down. When the FHA insurance premium is then added to the loan amount, the mortgage is nearly “under water” from the beginning, thus increasing foreclosure risk. Why would FHA do this? Who would benefit? Builders and mortgage companies certainly would, but it’s not clear that borrowers would.] 

•         Need a credit score of at least 580 to qualify. Many FHA lenders already require a higher score, but there had been no standard requirement across the program. Borrowers with a score lower than 580 will need a down payment of at least 10 percent. 

The changes come as borrowers with loans backed by the agency have increasingly been falling into default. More than 18 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 14 percent for all loans, according to the Mortgage Bankers Association.  

Mortgage lenders "will find the new rules painful but necessary," said Howard Glaser, a mortgage industry consultant and former housing official during the Clinton administration.
[HOT: Painful? The new rules will benefit lenders by increasing the loan principal at the same interest rate. We see no downside for mortgage lenders, especially since they can pawn off these risky, but FHA-insured, loans to Wall Street investors.] 

There also have been fears that unscrupulous operators have shifted their business to the FHA after the subprime business went bust. Last week, the agency served subpoenas on 15 mortgage companies — including Lakeway-based Alethes LLC — with suspiciously high default rates for FHA loans.