FHA Rules Changing Faster Than I Change My Underwear

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I hope I got your attention?  If you have not been paying attention to the changes the leading mortgage lender in the country is up to, you may want to start paying attention now!

A little background:  For many years FHA has served a specific portion the home buying population that could not obtain mortgages through conventional means.  In essence, FHA was the lender of last resort, but a very acceptable, and important participant in the process.  Prior to the real estate run-up which started in 2001 – 2002, FHA had a moderate, but commanding share of the mortgage market.

That all started to change once the run-up gained traction and conventional lending requirements were relaxed to the point that if you could fog a mirror you could get financed — and we know many home-buyers did just that.

The impact on FHA’s participation in the market was such that by the end of 2006, FHA’s market share had plummeted to just 4%.  In other words, FHA was fast becoming an after thought within the market place.

That all began to change in August 2007 with “sub-prime” meltdown.  We all know conventional lenders started to drop like flies, and eventually Fannie and Freddie tanked as well, significantly affecting the availability of mortgage funds.

In an effort to shore up the mortgage market the Government undertook a number of initiatives including promoting FHA as the answer to the dwindling, but still important (to the economy) mortgage and housing markets.

So, FHA became the predominate player in the mortgage field.  According to the charts in this link (FHA Single-Family Mortgage Originations and Market Share Report), through the second quarter of 2009, FHA had backed almost 27% of all new loans, and the total for both new and refinanced loans was over 19%.  In fact, I have heard that as many as 67% of all mortgages written in the past two years were FHA backed mortgages.    Bottom line: FHA became a huge player in the housing market, and in fact FHA became the de facto “sub-prime” lender within the housing market.

And you can guess what happened!

Borrowers have started to default at an alarming rate.  No news there. The latest figure I have seen is that 28% of all FHA mortgages are delinquent!

And, here is where the rules part comes into the picture

FHA was forced to look at tightening its lending criteria and change many aspects of its lending program to stem the tide of delinquencies.

Below are some of the FHA rules that have already changed or are pending.

1. Did you know that as of February 1st 2010, FHA won’t back a mortgage where there is a Homeowners Association, unless that HOA has a current Condo Reserve Study, approved by FHA.  And if one does not exist or is not approved, FHA will not back that mortgage?
2. How about this one . . . while the guideline appears to be pending, were you aware that some underwriters are now seriously questioning agreed contract prices which are higher then the listing price (this price increase is a technique used during negotiations to help the buyer obtain a higher seller concession by raising the contract price) even though the property appraises for the contract price.
3. Of course at the risk of insulting you, I am sure you are aware that FHA is poised to change a number of other requirements which include:   a.   Restricting seller contributions/concessions from 6% to 3%
   b.  Raising the downpayment amount from 3.5% to 5% , and that amount increases to 10% down for buyers with FICO scores under 580.
   c.   Increased up front costs for mortgage insurance payments, and
   d.  A number of other items which may or may not affect the overall buying pool.

I have not heard of a specific implementation date for these rules, though it appears that many underwriters are already factoring the anticipated changes into their underwriting practices.

Also, because I know for a fact this list is not all inclusive, you need to ensure that you figure out what is happening with all of the rule changes and adjust your business accordingly.  The FHA website would be a great place to start, or you could ask your friendly neighborhood mortgage broker — assuming there are any left.

Best of luck navigating these new waters, and keep in mind that you will have to adapt your business to these and many other new rules that seem to be coming at us at an ever increasing pace.  Of course if you choose not to adapt, you can quickly figure out the ultimate outcome for business by going to this site. 🙂

Best of luck!

Photo: Max Wolfe, via Flickr (CC license)

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.