The Obama administration is moving to tighten underwriting standards on FHA-backed loans by increasing the amount of upfront cash homebuyers must bring to the table, raising minimum FICO scores for new borrowers, and reducing maximum seller concessions from 6 percent to 3 percent.
The most obvious way to increase upfront cash requirements would be to raise the 3.5 percent minimum downpayment requirement for loans guaranteed by the Federal Housing Administration.
A bill introduced Oct. 1 by Rep. Scott Garrett, R-N.J., would raise the minimum downpayment for FHA loans to 5 percent and prohibit financing of closing costs.HR 3706, which has 27 co-sponsors, has been referred to the House Financial Services Committee.
Housing Secretary Shaun Donovan, briefing committee members on the administration's plans Wednesday, said there are several ways to make sure borrowers have more "skin in the game" currently under consideration.
HUD has "made the decision to exercise our authority to increase the upfront cash that a borrower has to bring to the table in an FHA-backed loan," Donovan said, but there "are several ways to accomplish this, and so we are currently analyzing various options to determine which is the most effective and consistent with our mission."
Testifying on behalf of the National Association of Realtors, Vicki Cox Golder urged Congress and the administration to "exercise caution before introducing proposals that may have a profound adverse impact on our economic recovery."
NAR is strongly opposed to HR 3706, she said, because increasing FHA's downpayment requirements would make it impossible for many borrowers to use the program, and "not add a penny to FHA's reserves."
Dan Green, a Cincinnati-based loan officer for Mobium Mortgage Group Inc., said an increase in minimum FICO could have "a much larger impact than increasing downpayment requirements from 3.5 to 5 percent."
The minimum FICO score for FHA-backed loans was raised from 500 to 580 earlier this year, he said, although most lenders already have even higher minimums.
"Most consumers are going to walk into their bank, and their bank will say 620" is the minimum score needed to obtain a mortgage, Green said.
FHA is in a difficult position, Green said, because Fannie Mae and Freddie Mac continue to tighten their guidelines, and that pushes more borrowers who are less creditworthy into FHA loans.
"They are trying to limit their exposure to the riskiest borrowers," Green said. "Your median FHA borrower looks decidedly worse today than 18 months ago." ...CONTINUED