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FHA Outlines Changes to Manage Risk, Protect MMI Fund

""Keeping her promise"":http://dsnews.comarticles/galante-gains-support-after-committing-to-fha-reforms-2012-12-19 to Senator Bob Corker (R-Tennessee), ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration commissioner Carol Galante announced Wednesday a series of changes to be issued this week that will allow the agency to better manage risk and strengthen its ""anemic Mutual Mortgage Insurance (MMI) Fund"":http://dsnews.comarticles/fha-mmi-fund-in-negative-agency-says-it-wont-need-immediate-treasury-draw-2012-11-16.

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""These are essential and appropriate measures to manage and protect FHA's single-family insurance programs,"" Galante said. ""In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.""

The first major change will be the consolidation of FHA's Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) and Saver Fixed Rate HECM pricing options.

Because the standard pricing option represents a majority of the loans insured through the HECM program, it is responsible for much of the significant stress on the MMI fund, FHA said. To help sustain the reverse mortgage program as a viable financial resource for older homeowners, the HECM Fixed Rate Saver will be the only pricing option available to borrowers seeking a fixed-rate mortgage, thereby lowering upfront closing costs while permitting a smaller payout.

Those changes (which will be effective for FHA case numbers assigned on or after April 1 of this year) are discussed in greater detail in FHA's HECM ""Mortgagee Letter"":http://portal.hud.gov/hudportal/documents/huddoc?id=13-01ml.pdf.

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In addition, the agency plans to increase its annual mortgage insurance premium (MIP) by 0.10 percent for most new mortgages and by 0.05 percent for jumbo loans. The premium increases exclude certain streamline refinance transactions.

FHA will also require most of its borrowers to continue paying annual premiums for the life of their mortgage loans. The agency previously canceled required MIP on loans when the outstanding principal balance reached 78 percent of the original principal.

""FHA remains responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, a term which often extends far beyond the cessation of these MIP payments,"" the agency said in a release. ""FHA's Office of Risk Management and Regulatory Affairs estimates that the MMI Fund has foregone billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy.""

Other changes announced Wednesday include a requirement for manual underwriting on loans with credit scores below 620 and debt-to-income (DTI) ratios above 43 percent and the raising of down payments on loans above $625,500, the conforming limit for loans in high-cost areas.

Finally, FHA announced it will step up its enforcement efforts for FHA-approved lenders with regard to aggressive marketing to borrowers with previous foreclosures. Borrowers are currently able to access FHA-insured financing as soon as three years after experiencing a foreclosure, but only if they have re-established good credit and qualify for an FHA loan in accordance with the agency's underwriting requirements.

""It has come to FHA's attention that a few lenders are inappropriately advertising and soliciting borrowers with the false pretense that they can somehow 'automatically' qualify for an FHA-insured mortgage three years after their foreclosure,"" the agency said. ""This is simply not true and such misleading advertising will not be tolerated.""

FHA will also work with other federal agencies to address false advertising by non-approved entities, the release said.

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.
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