FHA Takes Additional Steps to Bolster Capital Reserves

As part of a broad effort to strengthen the Federal Housing
Administration’s (FHA) Mutual Mortgage Insurance Fund (MMI Fund), FHA
Commissioner Carol Galante announced a series of changes to be issued this week
that will allow the agency to better manage risk and further strengthen the
health of the MMI Fund.

“These are essential and appropriate measures to
manage and protect FHA’s single-family insurance programs” said Galante. “In
addition to protecting the MMI Fund, these changes will encourage the return of
private capital to the housing market, and make sure FHA remains a vital source
of affordable and sustainable mortgage financing for future generations of
American homebuyers.”

Home Equity Conversion Mortgage

As discussed in its Annual Report to Congress, FHA
will consolidate its Standard Fixed-Rate Home Equity Conversion Mortgage (HECM)
and Saver Fixed Rate HECM pricing options. This change will be effective for FHA
case numbers assigned on or after April 1, 2013. The Fixed Rate Standard HECM
pricing option currently represents a large majority of the loans insured
through FHA’s HECM program and is responsible for placing significant stress on
the MMI Fund. To help sustain the program as a viable financial resource for
aging homeowners, the HECM Fixed Rate Saver will be the only pricing option
available to borrowers who seek a fixed interest rate mortgage. Using the HECM
Fixed Rate Saver for fixed rate mortgages will significantly lower the
borrower’s upfront closing costs while permitting a smaller pay out than the
HECM Fixed Rate Standard product, thereby reducing risks to the Mutual Mortgage
Insurance Fund. Read FHA’s new HECM
Mortgagee Letter

In addition to the HECM consolidation announced
today, FHA will announce the following changes in the coming

Changes to Mortgage Insurance Premiums
FHA will
increase its annual mortgage insurance premium (MIP) for most new mortgages by
10 basis points or by 0.10 percent. FHA will increase premiums on jumbo
mortgages ($625,500 or larger) by 5 basis points or 0.05 percent, to the maximum
authorized annual mortgage insurance premium. These premium increases exclude
certain streamline refinance transactions.

FHA will also require most
FHA borrowers to continue paying annual premiums for the life of their mortgage
loan. Commencing in 2001, FHA cancelled required MIP on loans when the
outstanding principal balance reached 78 percent of the original principal
balance. However, FHA remains responsible for insuring 100 percent of the
outstanding loan balance throughout the entire life of the loan, a term which
often extends far beyond the cessation of these MIP payments. FHA’s Office of
Risk Management and Regulatory Affairs estimates that the MMI Fund has foregone
billions of dollars in premium revenue on mortgages endorsed from 2010 through
2012 because of this automatic cancellation policy. Therefore, FHA will once
again collect premiums based upon the unpaid principal balance for the entire
period for which FHA is entitled. This will permit FHA to retain significant
revenue that is currently being forfeited prematurely. Read FHA's new MIP
Mortgagee Letter.

Requiring Manual Underwriting on Loans
with Decision Credit Scores below 620 & DTI Ratios over 43

FHA will require lenders to manually underwrite loans for
which borrowers have a decision credit score below 620 and a total
debt-to-income (DTI) ratio greater than 43 percent. Lenders will be required to
document compensating factors that support the underwriting decision to approve
loans where these parameters are exceeded, using FHA manual underwriting and
compensating factor guidelines. Read FHA's new DTI
Mortgage Letter

Raising Down Payment on Loans above

Through a Federal Register Notice to be published in the
next several days, FHA will announce a proposed increased down payment
requirement for mortgages with original principal balances above $625,500. The
minimum down payment for these mortgages will increase from 3.5 to 5 percent.
This change, coupled with the statutory maximum premiums charged for these
loans, will help protect FHA and further facilitate its efforts to encourage
higher levels of private market participation in the housing finance

Access to FHA after Foreclosure
FHA will step
up its enforcement efforts for FHA-approved lenders with regard to aggressive
marketing to borrowers with previous foreclosures and remind lenders of their
duty to fully underwrite loan applications. New loans must meet all FHA

Borrowers are currently able to access FHA-insured financing
no sooner than three years after they have experienced a foreclosure, but only
if they have re-established good credit and qualify for an FHA loan in
accordance with FHA’s fully documented underwriting requirements. It has come to
FHA’s attention that a few lenders are inappropriately advertising and
soliciting borrowers with the false pretense that they can somehow
“automatically” qualify for an FHA-insured mortgage three years after their
foreclosure. This is simply not true and such misleading advertising will not be

Moreover, FHA will work with other federal agencies to
address such false advertising by non-FHA-approved entities. Finally, as
discussed in its Annual Report to Congress, FHA is also committed to structuring
a new housing counseling initiative that would apply to a number of borrower
classifications, including borrowers with previous

Continuing Effort to Improve Risk

The changes announced this week will further contribute
to the efforts made throughout the Obama Administration’s tenure to improve risk
management at FHA and protect the Mutual Mortgage Insurance Fund. Because of
these commitments, the changes made at FHA over the past four years have already
added more than $20 billion in value to the MMI Fund.

For more
information, visit www.hud.gov.