FHA Mortgages to Cost Borrowers More

Home buyers will have to make a larger down payment to get an FHA-backed mortgage and will need to have higher minimum credit scores under changes announced today by HUD Secretary Shaun Donovan.

Reporting from Washington - Home buyers will have to pay more cash upfront to get a mortgage backed by the Federal Housing Agency and will need to achieve higher minimum credit scores under changes announced today by Housing and Urban Development Secretary Shaun Donovan.

In testimony prepared for a House hearing on the agency's increasingly precarious finances, Donovan also said he was considering raising the premium the FHA charges for mortgage insurance and will ask Congress for the authority to do so if needed.

He wants to make those and other changes because a recent audit has shown that the FHA's reserves have fallen below mandated levels as the agency has become a larger part of the housing market. The percentage of mortgages insured by the FHA has soared from 6% in 2007 to almost 30% this year. The FHA insures mortgages made with as little as 3.5% for a down payment and has become vital in a housing market where credit remains tight and borrowers' bank accounts have been depleted by the financial crisis.

In Southern California, the number of FHA-backed loans has soared, becoming a crucial source of financing for first-time home buyers, particularly those snapping up foreclosed homes. FHA loans made up 38.3% of all Southland purchase loans in October, up from 32.5% a year earlier and just 2% two years prior, according to MDA DataQuick, a San Diego real estate research firm. Riverside County had the region's highest rate of FHA loans, at 49.2% of the market.

"The loans FHA insures must be safe and self-sustaining for the taxpayer over the long-term," Donovan said in his testimony. "With these reforms and others we will be considering, the Administration is committed to ensuring that they are today -- and into the future."

Donovan said the expanded role of the FHA, which he oversees, is only temporary until the mortgage financing market recovers.

Many lawmakers are concerned that the FHA, which is funded by mortgage insurance premiums paid by borrowers, will need an infusion of government money. The agency is supposed to hold a secondary reserve fund equal to 2% of all the mortgages on its books. An annual independent actuarial study released last month showed the reserve had fallen to .53%.

Aware in September that the reserve fund would fall below 2%, the FHA announced several policy changes to reduce its risk of future losses to limit the chances the fund will have to be tapped. Those changes included requiring lenders to have at least $1 million in cash and other assets, up from $250,000, to issue FHA-backed loans.

But with the actual shortfall of the reserve fund larger than expected, Donovan announced the additional changes today.

"We've learned from recent history that the market is fragile, and we have to plan for the unexpected," he said.

Many details still need to be worked out. For example, the agency wants to increase the upfront cash required from borrowers so they "have more 'skin in the game' and a stronger equity position in their loans."

But administration officials are analyzing several ways to do that. Likewise, HUD is analyzing what the minimum credit score should be for an FHA-backed loan. Any change there would be temporary, he said.

Donovan can make those changes without congressional approval, but would need a vote by lawmakers to increase its mortgage insurance premium because it is at the mandated limit.

Donovan did not propose increasing the minimum down payment from 3.5%, a change some lawmakers are advocating. Rep. Scott Garrett (R-N.J.) has introduced legislation raising the minimum down payment to 5%.

Courtesy of LA TIMES