Scotsman Guide - February 2010 Residential Edition

By Richard Smith
Retail manager
American Acceptance
Mortgage Inc.

Work ing w ith the New FHA

aware of the changes and prepared for
their effects.

The growing importance of FHA insurance comes as a result of the mortgage market’s struggles. It also creates risk for the FHA and for its future role in the housing market, however. This is evident in the highly publicized deficiency in the FHA’s capital-reserve account. In 2009, that secondary-reserve fund dipped below a congressionally mandated level.

In response to market realities, the
FHA has implemented the following
changes:
It increased the minimum down- •
payment from 3 percent to 3. 5
percent.
It dropped seller-funded • downpay-
ment assistance.
It modified streamline-refinance •
requirements.
In addition, an FHA change that will
prohibit broker-ordered appraisals will
take effect on Feb. 15, as of press time,
rescheduled from this past Jan. 1.

changes that they had considered for some time. Whereas not long ago the FHA was concerned with its declining market share and its minimal market influence, it now is in a position to set its own terms.

Other changes from the U.S. Depart-
ment of Housing and Urban Develop-
ment (HUD), which oversees the FHA,
may include the following:
Further increasing the minimum •
downpayment
Decreasing allowed seller • conces-
sions from 6 percent to 3 percent
Increasing minimum credit-score •
limits
Increasing mortgage-insurance •
premiums
Although financial woes at the FHA
are cause for concern, mortgage bro-
kers should understand the reality of
the administration’s finances before
passing judgment.

The FHA has two funds: a regular financing account and a capital-reserve account. The financing account holds reserves for forecasted claims in the next 30 years. The capital-reserve account, on the other hand, includes reserves in excess of those in the financing account.

The capital-reserve account was created in 1990 in response to the economic problems in the 1980s, and it exists to provide excess reserves for periods of economic stress. In essence, the account served its purpose well through the economic troubles of the past few years. At the same time, however, it fell below a congressionally mandated level of 2 percent of outstanding FHA-insured loans.

HUD and FHA officials insist the FHA
won’t need a bailout, and changes to
FHA lending intend to remedy the ad-
ministration’s finances.
Brokers must stay
aware if they want
to offer loans insured
by the government

It’s hard to overstate how impor- tant home loans insured by the Federal Housing Administration (FHA) have become to the mortgage-brokerage industry. In the past two years, FHA lending has shifted from a product many brokers didn’t offer to a program borrowers frequently seek. In response, some FHA fundamentals are undergoing significant alterations. Mortgage brokers should be keenly

Market motivation
The impact of increased market share
and increased losses motivated gov-
ernment officials to implement FHA
As of press time, a proposal by
the U.S. Department of Housing
and Urban Development (HUD)
to change the way brokers work
with Federal Housing Administra-
tion (FHA) loans remained under
review.
If it is implemented, the pro-
posal will prevent mortgage bro-
kers — which the FHA refers to as
supervised and nonsupervised
loan correspondents — from offer-
ing FHA-insured loans directly to
borrowers.
Although brokers would still
be able to participate in FHA pro-
grams, they would do so as loan
originators on behalf of approved
lenders. As unapproved origina-
tors, they would not be charged
any fees by the FHA. Further, liabil-
ity for all FHA-insured loans would
be placed on the approved lenders
with which brokers do business.
The comments period on the pro-
posal is closed.
For FHA Commissioner David H.
Stevens’ insights about the pro-
posed rule change, read Scotsman
Guide’s January Q& A at sctsm.
in/3916.
Also see:
HUD’s release on • the proposed
change: sctsm.in/FHA1130
All HUD/FHA mortgagee letters: •
sctsm.in/mortgagee
(800) 350 7199 ext 103 · bismarkmortgage.com
Loans made pursuant to Department of Corporations. California Finance Lending License No. 6037655. Arizona Mortgage
Banker’s License No. 902780. Provided to mortgage professionals for information only and not intended or authorized for
consumer or public distribution. Rates and terms are subject to change.
Fixing FHA finances
According to a fiscal year 2009 actu-
arial review, the FHA’s finances should
return to strong footing no later than
2012. Brokers should understand the
FHA’s intention to strengthen its fi-
nances and the changes in credit qual-
ity, broker-lender relationships, and
standards for borrowers, property and
under writing that have taken place and
that will continue to take place.

In addition to program changes, the FHA has increased enforcement and taken action against lenders that have unsatisfactory portfolios and operations. More important to many brokers, however, is the impending requirement for appraiser independence. When the rule takes effect on Feb. 15, brokers no longer can order appraisals or select appraisers when working with FHA-insured loans.

FHA guidelines don’t, however, re-
quire the use of appraisal-management
companies, and FHA-insured loans
aren’t affected by the Home Valuation
Code of Conduct (HVCC). The code
pertains to loans sold to Fannie Mae
and Freddie Mac, and HUD openly ac-
knowledges as much. On the other
hand, according to an FHA press re-
lease, the administration intends to
adopt language from the HVCC to en-
sure alignment with Freddie and Fannie
standards.