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FHA Mulling More Stringent Mortgage Rules

More up-front money from borrowers may be required in an effort to buttress the agency's finances

Home buyers might soon have to bring more cash to the table to qualify for Federal Housing Authority-backed mortgages. The FHA mortgages, which now make up 30% of originations, have surged in popularity because borrowers need a down payment of just 3.5% to qualify, but the housing crisis has battered the agency's reserves. Housing & Urban Development Secretary Shaun Donovan outlined options for the FHA before the House Committee on Financial Services on Dec. 2. He said the agency's capital reserve ratio has fallen to 0.53%—far below the 2% level required by law. The FHA is also weighing options to toughen underwriting standards to lessen default risks but won't make detailed recommendations until January. Among the possibilities: increasing credit score requirements, insurance premiums paid by borrowers, and minimum down payments. Donovan and FHA Commissioner David H. Stevens said they want borrowers to have "more skin in the game." To that end, the agency might force borrowers to pay up-front premiums rather than rolling them into the loan and might reduce the concessions sellers can offer for closing costs from 6% to 3%. Forcing buyers to pay the premium up front could add as much as $3,000 to a typical $200,000 fixed-rate mortgage. Credit Score Effects

The agency is seriously considering the possibility of tying payment requirements to credit scores. In other words, borrowers with low credit scores might be required to put more down and those with high credit scores could be rewarded with a lower minimum down payment. In an interview after the hearing, Stevens said that even loans with higher down payments perform worse when the the borrower's credit score is low. Stevens would not say what he thought about a House bill that would raise the minimum down payment for an FHA loan from 3.5% to 5%. But he said the agency does not want to make a move that would have a negative impact on the housing market recovery. "We will consider every scenario," Stevens said. "We are looking at this much more robustly. What we're considering is, will this benefit the FHA [reserve] fund and protect the taxpayer far more than a little move like [increasing] the down payment?" The concern among those in the mortgage industry is that tightening the FHA rules could stifle an ongoing housing recovery. Dale Siegel, a mortgage broker in Harrison, N.Y. and author of The New Rules for Mortgages (Penguin), said increasing up-front costs will keep some buyers out of the market and could significantly slow home sales in markets dominated by FHA loans. "The question is, will it have a short-term effect on the resurrection of the housing market?" Siegel said. "The answer is yes." David Zugheri, co-founder of Envoy Mortgage in Houston, said a borrower buying a $200,000 home would see his closing costs increase by about $3,000 if the up-front premium couldn't be financed, Zugheri said. By comparison, the cost to finance the premium would only be about $20 a month. "The gap in this scenario of $3,000 is enough to push a percentage of borrowers out of the market," he said.

Gopal writes about real estate for BusinessWeek in New York.

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