HUD Mortgagee Letters

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending

1. o The initial up-front MIP increase is included in Mortgagee Letter 2010-02, which was published on January 21st and will go into effect April 5, 2010.

   (Click here to view the full text of Mortgagee Letter 2010-02)

   1. o The first step will be to raise the up-front MIP by 50 basis points to 2.25% and request legislative authority to increase the maximum annual MIP that FHA can charge so we shift some of the premium increase from the up-front MIP to the annual MIP.
   2. o This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing.

2. Update the combination of credit scores and down payment requirements for new borrowers

1. o New borrowers will now be required to have a minimum credit score of 580 to qualify for maximum financing. New borrowers with less than a 580 credit score will be limited to a 90% loan-to-value ratio.
2. o This allows FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.

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3. Reduce allowable seller concessions

1. o FHA borrowers will be limited to 3% seller concessions.
2. o The current level exposes FHA to excess risk by creating incentives to inflate appraised value. This modification will bring FHA into conformity with industry standards on seller concessions.
3. o This change will be posted in the Federal Register shortly, and after a 30-day notice and comment period, would go into effect in the summer.

4. Increase lender enforcement

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   1. o Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
   2.  Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
   3.  This change was included in Mortgagee Letter 2010-03 published on January 21, 2010.

(Click here to view the full text of Mortgagee Letter 2010-03)

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   1. o Implement statutory authority through regulation of Section 256 of the National Housing Act to allow for enforcement of indemnification provisions for lenders using delegated insuring process (Lenders Insurance).
   2.  Specifications of this change will be posted in March and, after a 60-day notice and comment period, would go into effect in the summer.
   3.  The authority will allow FHA to obtain indemnifications on "material" errors within underwriting of a loan that had clear impact on the loan decision.
   4.  The authority does not provide for indemnification of loans that were underwritten to guidelines, but have gone delinquent due to a borrower or marketplace change.
   5. o Additionally, HUD is pursuing legislative authority as follows:
   6.  Amend Section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would expand the authority discussed above to all lenders for the origination and underwriting of FHA-insured loans.
   7.  Authority permitting HUD maximum flexibility to establish separate "area(s)" for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches.

Listed below are some questions we have been asked frequently since announcing the above policies:

Q: Why didn’t you just impose an across-the-board increase in required down payment?

A: There are a range of factors that determine how risky a loan can be, not just the down payment level. The data clearly show that the greatest problems are created by a combination of a low down payment and other factors, like low credit scores, higher back-end ratios, or other debt characteristics. Indeed, loans with lower down payments and higher credit scores perform better on average than some sets of higher down payment, lower credit score loans. So in addressing risk, we need to take a focused approach to ensure that we are targeting our measures appropriately. Our change enables a broader selection of credit-worthy borrowers than would be afforded by an across the board increase in the down payment requirement, while avoiding the significant, disproportionate impact on minorities that such an overbroad measure would have.

Q: There have since been some modifications to the Lender Enforcement Policy. Can you explain what the modifications are and the reasons for the change?

Q: Will these changes be enough?

A: The policy changes announced in September and those announced last month together comprise the most dramatic changes to FHA in recent history. These changes represent significant, concrete steps to minimize FHA’s exposure to losses in the existing loan portfolio, increase the quality and sustainability of new FHA-insured loans, and improve FHA’s capital. Additionally, FHA is continuing to assess the appropriateness of its risk management policies and their impact on the sustainability of the mutual mortgage insurance (MMI) reserves, and may decide upon further changes as a result of this ongoing assessment. We are asking Congress for authority to increase the statutory cap on the annual MIP and to permit termination of origination and underwriting approval on a national basis. These changes will give FHA the authority necessary to continue to respond effectively.