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FHA Changes Credit Policy Ahead of Reserve Ratio Drop

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(Update 1: Clarifies the consistency of FHA's policies on appraiser independence with the HVCC.) Federal Housing Administration (FHA) commissioner David Stevens on Friday outlined plans to implement credit policy changes to reduce risk and strengthen the FHA's reserves. The changes come as FHA officials anticipate a forthcoming annual actuarial review to show the capital reserve ratio dropping below the congressionally mandated 2%, according to a release. The FHA insures approved lenders against default-related losses on mortgages that meet certain credit standards. Both the planned credit policy changes and Stevens’ intention to hire a chief risk officer for the first time in the FHA’s 75-year history come as the actuarial study wraps up. FHA will send the study to Congress in November. "To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action," Stevens said.  "That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections." FHA also plans to propose an increase in the net worth requirement for approved lenders from its current level at $250,000, which has not been raised since 1993. The US Department of Housing and Urban Development (HUD) proposed an initial increase of nearly $1m that would be implemented within one year of the rule’s enactment. HUD may propose further increases in the coming years to maintain consistency with industry standards, according to the new guidelines. Effective January 1, 2010 the new policies require supervised lenders to submit audited annual financial statements to FHA to ensure that they are adequately capitalized to meet potential needs. Given that most lenders already send prepared financial statements to the government-sponsored enterprises (GSEs) and investors, the new policy is designed to reduce risk at limited cost, according to the release. The new policies revise current procedures to streamline refinance transactions. FHA will establish new requirements for seasoning, payment history, income verification and demonstrate a net tangible benefit to the borrower. The new changes provide for a collection of credit score information when available and caps the maximum loan-to-value (LTV) ratio at 125%. Also, new guidelines will be provided on ordering appraisals for FHA-insured mortgages and supports the agency’s current policies on appraiser independence, which remain "consistent with" the objectives of the Home Valuation Code of Conduct (HVCC) although the HVCC does not apply to FHA. The FHA said it plans to adopt language from the Code to align its standards with those of the government-sponsored enterprises (GSEs), which fall under the HVCC. A second appraisal can be ordered under FHA's new guidelines when a borrower switches from one lender to another. The first lender must transfer the appraisal to the second lender at the request of the borrower, preventing delays in closing, according to the new guidelines. Lenders seeking to originate, underwrite or service FHA loans must meet eligibility criteria. Mortgage brokers will still be able to originate these loans through their relationships with approved lenders, but they will no longer receive independent FHA approval of eligibility, according to the new changes. Write to Jon Prior.

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