Loan Modification

FHA Requests Legislative Approval of Proposals for Reducing Mortgage Risk

By Karen Lawson

FHA Commissioner David H Stevens addressed Senate lawmakers with comments concerning the role of the federal government in the mortgage loan industry. After the sub-prime market crashed in 2007, the market share of FHA loans has grown from less than 10% to 30% or more. FHA also insured approximately 20% of mortgage refinance loans in 2009, which assisted approximately 800,000 families obtain stable, affordable mortgage loans. Citing the fragile US housing market, Stevens noted that FHA must not disturb the markets with “aggressive actions.”

FHA Commissioner Requests Approval of Recent Proposals

Some recent FHA proposals for reducing risk and shoring up its diminishing fund for paying mortgage insurance claims require legislative approval. When FHA reserves dipped below legally mandated levels, FHA proposed actions designed for replenishing its reserves and reducing risks associated with its home loan programs:

• Increasing mortgage insurance premiums charged to borrowers
• Tightening loan approval requirements
• Hiring a risk officer for managing current and potential risk

As with private sector mortgage loans with a loan-to-value ratios (LTV) in excess of 80%, FHA guidelines require borrowers to pay premiums for its mutual mortgage insurance (MMI) program. Borrowers pay a portion of the MMI premium at closing, and the remainder is pro-rated into borrowers’ monthly payments. FHA recently asked legislators to raise the percentage of annual MMI payments to prevent borrowers from paying too much up front.

In efforts to prevent losses associated with irresponsible lending practices, FHA is emphasizing enforcement of FHA requirements and is increasing its review of FHA approved lenders. FHA has taken actions against 6 times as many lenders since FY 2009 than it cited during 2000-2008.

Enforcing its lending requirements more rigorously helps FHA reduce the risk of mortgage foreclosures and prevents additional drain on FHA funds used for reimbursing lenders for losses connected with mortgage loan delinquencies. Moreover, increased scrutiny of FHA approved lenders helps with minimizing non-compliant mortgage lending practices and reducing mortgage fraud.

FHA Committed to Providing Affordable Mortgage Loans, Responsible Lending

Although FHA’s lending guidelines were compromised by some FHA lenders in their haste to process high volumes of mortgage loans before the housing bust, FHA lending requirements require full documentation of income, employment, and other assets used for buying or refinancing a home, unlike with Alt-A loans of years past.

FHA insures mortgage loans for new construction, buying and refinancing existing homes, and for purchasing and rehabilitating homes. FHA programs benefit neighborhoods and reduce foreclosure losses by providing responsible home loan options for those ineligible for conventional mortgage loans.

Full post as published by FHA Mortgage Guide on May 13, 2010 (boomark / email).