Amidst speculation that its capital reserve ratio, which is congressionally-mandated, might be falling below 2%, the Federal Housing Administration (FHA) on 18th September 2009 announced new changes to its credit policy. In addition to this the FHA commissioner, David H Stevens announced that for the first time in its 75 year history, the FHA will appoint a Chief Risk Officer. Both changes are in sync with the fact the agency’s independent actuarial study is being completed and is being sent to Congress in November. The above mentioned changes to a credit policy are believed are going to strengthen the FHA.
The FHA capital reserve ratio is the amount of reserve funds the FHA holds over and above the projected losses over the next 30 years. While that sits currently at 4.4% of its insurance or $30 billion, the FHA is more concerned with long term survival. With changes to credit policies, the FHA also is making sure that they are able to provide affordable loans especially to the first home buyers in this tough economic climate as the US heads out from a recession to recovery phase. Mr. Stevens clearly started that the FHA does not require tax payer assistance nor does it require any action on part of the congress, it is taking these steps to ensure the strength of the fund.
FHA Credit Polich Changes
Some of the changes to credit policies announced by the FHA are:
- Submission Of Audited Financial Statements By Mortgagees: In line with the new credit policy changes, supervised mortgagees will require to submit supervised financial statements to FHA. This is to ensure that these parties are able to meet their potential needs and are adequately capitalised.
- Streamline Refinances: With the introduction of the new changes to the FHA credit policy, the new Loan to Value ratio is going to be capped at 125 percent. In addition to this there will be need top show tangible benefits to the borrower as there will be new standards for income verification, repayment history and the collection of credit score. If the borrower wishes to add closing costs to the transaction there will be an appraisal required as this will also bring the streamline refinances in line with other FHA loan origination guidelines.
- Appraiser Independence: The FHA has taken steps to ensure the its valuation policies are in line with the Home Valuation Code of Conduct (HVCC). It has taken language out of the HVCC o ensure that it completely aligns itself with Government Sponsored Enterprises standards.
- Mortgagee Approval For Participation In Loan Origination: In order to participate in the FHA loan origination program, FHA has introduced the following changes:
1. Mortgagees with approval status must assume liability for all loans approved.
2. While mortgage broker will still be able to still, originate loans through approved mortgagees they will no longer receive independent approval for origination eligibility from FHA.
These changes should align FHA with GSE’s and should potentially increase the number of mortgage brokers.
- Net-Worth Requirements: The FHA plans on increasing the net-worth requirements for approved mortgagees from the $250,000 mark, which hasn’t changed since 1993, to $1 million. This mark may be increased in the future to ensue that FHA is in line with other GSE’s and their net-worth requirements and guidelines. This should help FHA mitigate losses and reduce the future risk on the fund.
These are some of the credit policy changes that can be anticipated from the FHA office come November and once its independent annual actuary is submitted to Congress.
References:
- FHA Announces Credit Policy Changes – U.S. Department of Housing and Development
- FHA Changes Credit Policy – Housing Wire