Loan Modification

FHA Mortgage Loan Guidelines: Policymakers Challenging Changes

By Karen Lawson

The Louisiana Weekly reports concerns registered by the Center for Responsible Lending (CRL) and other community and housing advocacy agencies in response to pending changes to FHA loan guidelines. The controversy stems from FHA’s need to shore up its reserves after a wave of mortgage foreclosures drained the agency’s fund for reimbursing lenders to well below its legally required minimum.

Critics note that changes designed to cost mortgage borrowers more at the closing table or add to their monthly mortgage payments are counterproductive for providing affordable housing to low and moderate income families.

FHA loan guidelines: Housing advocacy agencies propose their own changes

The CRL asserts that the recent foreclosure crisis was caused not by low income borrowers, but instead by the greed driven actions and decision making by certain mortgage lenders and brokers; it notes that proposals for raising the minimum credit score requirement and charging higher mortgage insurance premiums up front and annually will obstruct the path to buying a home for some. CRL recommends the following changes as alternatives to FHA’s current plans:

• Eliminating the “yield spread premium” paid by mortgage lenders to mortgage brokers: If adopted, this would prevent mortgage lenders from paying premiums to mortgage brokers who originate high cost mortgage loans.
• Increasing oversight over FHA approved mortgage lenders: CRL recommends intensifying scrutiny of FHA approved lenders to prevent excessive mortgage loan fees, and is requesting additional preventive measures for reducing the number of higher cost FHA home loans slipping through the cracks.
• Ensuring that borrowers are not victimized by “junk fees” and excessive charges: The CRL asserts that the recent foreclosure crisis was caused by “…reckless and predatory lending practices and toxic financial products [and] not by any policy goal aimed at increasing home ownership.” Unfortunately, if FHA wishes to keep its home loan programs self sustaining, raising mortgage insurance premiums either paid at closing or as part of monthly mortgage payments appears necessary.

Actions taken now for reestablishing the mortgage insurance fund may prevent much larger headaches down the road if the mortgage insurance fund sustains losses greater than its ability to reimburse lenders. This could lead to a taxpayer bailout, and resulting criticism of FHA guidelines and programs. In weighing the options between financial responsibility and making home ownership affordable for under served communities, FHA is likely to find itself between the proverbial rock and a hard place. Striking a compromise that serves both increasing FHA cash reserves and its original purpose for making home ownership affordable appears to be the only win-win option for the FHA.

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