FHA to make changes

In the latest example of government acting at cross purposes with itself, FHA is set to make changes to its program. My comments after the break. Here are the changes, which will become effective 8/15 unless modified”

1. Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.

2. Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to three percent will bring FHA into conformity with industry standards.

3. Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.

Of these 3, the one that makes no sense to me is #2. If the appriasal is a good one, then the borrower is not buying above the market value range. And decreasing the amount of seller concessions allowed right on the heels of an increase in DP requirement will lessen the pool of potential buyers, damaging the market at exactly the wrong time. If it is necessary, strengthen the appraisal process further!

Its fascinating to watch the noises being made within FHA to once again allow seller funded down payments programs–exactly the opposite of what they are doing with these new rules.

When goverement messes in the private secotr, it’s messy…