"All Things Edmonds" Blog

November 30, 2009 -- The Federal Housing Administration (FHA) has proposed tighter rules for lenders to reduce its risk and assure it can cover future losses. More on this as new information comes out, but here's a quick summary of why they are doing this and what impact it will have on our local real estate market in Edmonds, WA.

The FHA insures almost a quarter of all new loans made in 2009, and about 80 percent of that business is from first-time homebuyers.  Especially with the $8,000 homebuyer tax credit, the rush for new purchases has perhaps given some lenders incentive to push the lending limits for less qualified buyers.  This results in higher rates of mortgage delinquencies and because FHA guarantees these loans, they are left "holding the bag." 

Here's an interesting statistic: for the first nine months of 2009, 18% of FHA borrowers were at least one payment behind or in foreclosure, compared with 14 percent for all loans, according to the Mortgage Bankers Association.  Part of why FHA guarantees these loans is to promote home ownership among folks who otherwise might not afford it.  It gives lenders an incentive to lend out money.  But at the same time, just because the FHA is guaranteeing these loans isn't license for lenders to qualify the really unqualified.  Or so says the FHA.

The New Rules
The FHA proposes to require lenders to have a net worth of at least $1 million in the first year and $2.5 million within three years. That's up from the original requirement of $250,000. The government agency also wants to tighten approval requirements for lenders who want to originate, underwrite or service FHA loans and make them liable for those loans, including ones originated by mortgage brokers. 

The agency is tightening its regulations as its finances continue to worsen. FHA said in mid-November that its reserves fell to $3.6 billion, compared with $685 billion in outstanding insured loans for the fiscal year ended Sept. 30. That's a ratio of 0.53 percent and far below the 2 percent threshold required by Congress.