The Federal Housing Administration (FHA), which is insuring thousands of mortgages daily, is expected to announce that it is cracking down on its requirements.

Borrowers who receive an FHA-insured loan will have to pay a higher insurance premium initially.  This will be 2.25% of the value of the loan, up from 1.75%, an overall increase of 0.5% (mafia loan sharks refer to this vic as a half-point).

Sellers will not be allowed to offer as much aid to buyers to cover their closing costs.  The maximum amount of assistance will drop to 3% of the property value, which is down a total of 3% from its current 6%.

Other changes will attempt to hold lenders who participate in the FHA program more accountable by reporting their rankings.

The new measures are aimed at shoring up the agency’s finances while simultaneously filtering out unprepared borrowers.

Before this, the FHA has operated essentially out of the public eye.  However, it has become a point of contention as it has grown.  Some of the agency’s critics want is to tamp down risk by insuring a lesser amount of loans; others believe that it should aid the market by insuring a greater amount.

The FHA has been insuring 5.8M single-family homes that have a collective loan balance of $750B.  Over 0.5M of the loans were delinquent and moving towards foreclosure.

Lots of the aforementioned loans were made in the past couple of years during the economy crash.  This past autumn, the agency said that its cash reserves had plummeted to 0.5% of its outstanding loans, which is way below the 2%Congressional requirement.

Essentially left unscathed by the changes is the most controversial aspect of the agency’s program:  a provision that lets buyers make a down payment as low as 3.5%.  Private lenders require a minimum of 15%.

Borrowers who want to put the minimum down will be required to have credit scores of no less than 580.  Before, there was no minimum score.  However, this rule might have a negligible effect.  The agency says that new borrowers have higher scores anyway.

FHA critics contest that the agency is letting people become homeowners while requiring little of them, which they view as a replay of the bad lending practices that caused the housing increase and subsequent decline.

Agency officials have responded by saying that they have safeguards set up to assure that borrowers are creditworthy, and that the loans are rescuing the housing market from certain doom.

Lou Barnes, a loan officer with Premier Mortgage Group in Colorado who is among those that believe the government could do more to support the housing market, said the changes were not unduly restrictive.  He noted that the insurance premium was returning to its level of ten years ago.

“The FHA has done its best to protect the taxpayer, and the least harm to the credit supply,” Mr. Barnes said.

Howard Glaser, an industry consultant, said that with “the FHA hovering around 40% of new loan originations, even small rule changes echo.”

Mr. Glaser, a former official with the Department of Housing and Urban Development, which includes the FHA, said that “obtaining credit will be a little more expensive or it may be a little more difficult to qualify” but that the changes were “not enough to have a systemic impact on slowing home buying.”

cf http://www.nytimes.com/2010/01/20/business/20home.html?partner=rss&emc=rss