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FHA Insurance Fund to Fall Below Minimum, Policy Changes Coming


The Federal Housing Administration announced today that it will make a series of policy changes in reaction to its capital reserve ratio falling below the congressionally-mandated two percent minimum.

“To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action,” said FHA Commissioner David H. Stevens, in a statement posted on the HUD website.

“That said, given the size and scope of the FHA and its importance to today’s market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections.”

Effective January 1, the FHA will require supervised mortgagees to submit audited financial statements to ensure such entities are adequately capitalized.

The FHA may also up the net-worth requirement of mortgagees, from the current $250,000 to $1,000,000, which would likely lead to consolidation in the industry.

Mortgage brokers will still to be able to originate FHA-insured loans through their relationships with approved mortgagees, but will no longer receive independent FHA approval for origination eligibility.

“These policy changes will require the FHA approved mortgagee to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee.”

The FHA will also revise procedures for streamlined refinance transactions, establishing new requirements for seasoning, payment history, income verification, collection of credit score, and so on.

“These revisions bring documentation standards for streamline refinance transactions in line with other FHA loan origination guidelines, ensures the borrower’s capacity to repay the new mortgage, and prohibits the dangerous practice of loan churning, where borrowers raise cash through successive cash-out refinancings that put them further in debt.”

New appraisal guidelines will also come into effect; the appraisal validity period will be reduced to four months from six for all properties, though appraisal portability rules (transferring an appraisal from one mortgage lender to another) will ease.

The FHA will also adopt the language of the Home Valuation Code of Conduct (HVCC), meaning brokers will be prohibited from ordering appraisals.

Stevens also announced that a Chief Risk Officer will be hired for the first time in the FHA’s 75-year history to oversee and propose specific credit policy changes going forward.

I think we all saw this coming for a long, long time…

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