Understandably the mortgage industry and the insurers of loans, including the Federal Housing Administration (FHA), needed to have been doing more to mitigate risk in the previous years. It is no secret what has happened to our economy largely as a result of the imploding of the mortgage industry.
Subprime lending was fueled, in the larger part, by a sense of security served up by the ratings agencies like Standard and Poors. The higher ratings on mortgage backed securities resulted in lower qualifications and applicant requirements which resulted in wholesale defaults on loans. Eventually the defaults spread to borrowers who were fully qualified and used conventional loans but were affected by the industry collapse such as builder, real estate agents and employers of banks, lenders and mortgage brokers.
Sweeping changes being considered
Income in the lending industry is derived not only from the servicing of existing loans but heavily relies on the origination of new mortgages. What the FHA is considering would greatly impact the ability of lenders to underwrite and fund new loans insured by the agency. At this time there is only speculation as to what Shaun Donovan, Director of Housing and Urban Development which oversees the FHA, and his staff will propose and how those changes will affect housing and applicant's abilities to borrow.
Mr. Donovan, in an address to the House Committee on Financial Services on Dec. 2, reported the agency's capital reserve ratio has fallen to 0.53%—far below the 2% level required by law. Efforts to restore those reserves may take precedence over restoring the economy as it is affected by the housing market. Suspected changes include raising the amount of required down payment from the current 3.5% to 5%. Further the agency may lower the amount of closing contributions from the seller, currently at 6% of the sales price, to 3% which would also increase the amount of closing costs passed directly to the buyer.
Recipe for further disaster
Combine these changes with the new Fannie Mae underwriting rule mandating a maximum debt to income ratio to 45% regardless of other mitigating factors and when rates inevitably begin to rise there is major disaster on the horizon for housing and the American economy. "Don't think it can't get any worse", says Tom Burris a seasoned mortgage professional in Dallas, Texas, "because everything I see coming out of the regulators is further limiting the borrowers from being approved. Even people who have never missed a payment, have been on their job for years and have some savings are already being denied."
David H. Stevens, the current FHA Commissioner, said borrowers need to be required to put "more skin in the game." More skin is what most people who are effected by the recession do not have. Housing values are not yet stabilized and millions of homes have lost equity meaning people selling an existing home are often bringing money to the closing to add to the sales price to pay off the existing mortgage and have very little skin left to put in.
Your opinion matters
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Comments
I understand why HUD is concerned but I think this is the wrong thing to do and at the wrong time. I am in the process of building a home and will be using an FHA loan to finance it. I don't have more skin to put in the game. Not to mention, if I were to lose my job it wouldn't matter if I had put 3.5% or 20% down; if I am not making money I can't make my payment. This is just an easy way for them to boost the reserves at the expense of the average American and the fragile economy. Also, I want to know since I have already applied for my FHA loan if these new requirements would apply to me or only to newly originated loans. If it applies to all of them there is another potential disaster... I, and many others, may have to walk away from a deal already in progress and therefore further stress will be added to the economy as real estate contracts break apart and builders are left with inventory after buyers have to pull out of the deal.
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