FHA Looking To Increase Requirements For Insured Loans

Posted by Jason | Posted in Government | Posted on 02-12-2009

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While I don’t think tax payers should be subsidizing other people’s home purchases, this is what happens when the government’s games catch up with them. They are trying to prop up the housing market from the mess they created, but at the same time they are looking at contradictory policies that will harm the housing market.

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, plans to ask Congress on Wednesday to raise the cap on the annual insurance premium that the FHA can charge borrowers. In testimony before a congressional panel, he will also outline steps the agency is considering to set minimum credit scores, to require home buyers to put more money down, and to make lenders more accountable for loans that the agency insures.

Those measures are designed to begin rebuilding the agency’s depleted capital reserves. An independent audit last month said that the estimated value of those reserves had dropped to $3.6 billion, or about 0.5% of the $685 billion in loans the FHA has insured.

But any sharp crackdown could limit the pool of potential home buyers. Many rely on FHA-backed home loans.

“We have to replenish the reserves and we have to be prepared for a market outcome that may not be as favorable” as one that was forecast by the auditor, said David Stevens, the FHA’s commissioner, in an interview Monday. The audit estimated that the agency wouldn’t need any funds from the U.S. Treasury next year.

Raising insurance premiums could help avert the need for a taxpayer bailout of the agency, but the move would raise borrowing costs for home buyers. The FHA charges an upfront insurance premium of 1.75% of the loan amount. Borrowers pay additional annual premiums of either 0.5% or 0.55%.

The FHA will also limit the amount of money that sellers can provide for closing costs on home sales to 3% of the home price, from the current level of 6%. The agency is also finalizing plans to set a minimum credit score for borrowers, possibly by requiring those making small down payments to have higher credit scores.

via FHA Considers Ways to Boost Its Reserves – WSJ.com.

Many people are calling for a second decline in housing. It’s not hard to figure out why. FHA is looking to make it harder to get an FHA insured loan. Also, come April of next year, the tax rebate will expire and those who were going to buy will have already done so. There will be a decline at that point in buyers. The government should have just stayed out of the housing decline in the first place. The decline would have been quicker, and it would have stabilized leaving a bottom to build on. Instead, it is doing as it always does. It’s delaying the bottoming and leading to a new decline shortly in the future. So, it won’t prevent the eventual bottoming, and it leaves us with massive debt as a reminder of their failed policies.

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