FHA Gets Grilled for Just About Everything They Do

So I took the time to watch (most of) HUD Secretary Shaun Donovan’s testimony before the Senate Committee on Banking, Housing, and Urban Affairs.

He testified yesterday after a damning actuarial study was released a few weeks back, revealing that the FHA’s capital reserve fund had fallen below zero.

The video actually reminded me of a high school principal reprimanding a troublesome student, with Tennessee Senator Bob Corker laying down the law in a no-nonsense style.

You know, the kind of lecture that goes something like this: “You knew it was a bad idea, so why’d you do it.” At which point the student, Donovan, looks down at his shoes and offers little beyond, “I don’t know,” and “you’re right,” and “I’ll change, I promise.”

Unfortunately, you also kind of get the idea that this “student” is going to repeat the same mistakes over and over again, and may never learn his lesson.

Possible FHA Changes: Every Single Thing!

All in all, if you’re not into mortgages, the hearing was a yawn session. But for those who are, it offered a lot of juicy details, all of which seem to be bad for prospective homeowners.

First off, Corker challenged the FHA’s minimum Fico score of 580, arguing that most lenders don’t even accept scores that low, so why not raise it to 620 like conventional lenders.

Donovan replied by saying, “That is clearly something we are looking at.” And agreed that there may be adjustments made to the minimum Fico score required for an FHA loan.

Currently, the credit score floor is actually 500 if you put down at least 10%, and 580 for those who can only muster a 3.5% down payment.

With regard to reverse mortgages, Corker noted that the FHA was “losing its shirt,” and argued that the program should be shut down for two years, as had previously been suggested.

Then Corker moved on to loan limits, which are currently higher for the FHA compared to conforming loans backed by Fannie and Freddie.

Donovan’s response was rather frightening. He supported both a return to Housing and Economic Reform Act (HERA) imposed loan limits ($625,500) and pre-crisis loan limits, which were $417,000 max.

That change would clearly shut a ton of homeowners out of the FHA loan program, not to mention entire geographic areas.

Corker also wants FHA borrowers to continue paying mortgage insurance premiums, regardless of how low the loan-to-value drops, so long as the FHA continues to guarantee the loan.

Donovan called it an “excellent suggestion,” and added that “we are doing that for new loans.”

The good news is they can’t mess with existing contracts, so current FHA borrowers won’t be affected by any change.

Corker then went after Donovan for the FHA’s guidelines regarding homeowners who were previously foreclosed.

As it stands, borrowers who experienced a foreclosure as little as three years ago can apply for a new FHA loan.

But Donovan actually stuck to his guns on this one, and said if a borrower can demonstrate “that they are back at work and a responsible borrower again,” then “that’s someone we ought to work with.”

Still, he said they need to “clarify those standards,” so changes may come to those guidelines as well.

For the record, Fannie and Freddie require a five-year waiting period after a foreclosure to obtain a subsequent loan.

FHA No Longer a Subprime Dumping Ground

There was more, but I couldn’t stomach that much Senate testimony. Still, the message was more than clear.

The FHA needs to make a ton of changes, seeing that it appears to contain a ton of loopholes for high-risk borrowers to exploit.

It’s really a balancing act – the FHA needs to fulfill its original duty to serve the underserved, while also not allowing any old borrower to obtain a loan and put the entire program at risk.

What this means for future FHA borrowers is higher costs for all, and there’s really no way around that. It also means more stringent underwriting guidelines, lower loan limits, higher credit score requirements, and so on.

If you want to avoid these changes, you might want to get your FHA loan sooner rather than later, because with the fiscal cliff rapidly approaching, things aren’t going to get any cheaper.

(photo: katerha)