FHA wants to tighten limits on new mortgages

CHICAGO - The Federal Housing Administration is about to beef up the borrowing requirements for home buyers, a move that could dampen the fragile housing market's recovery.

Among the steps scheduled to be outlined today are greater down payment requirements and higher credit scores for consumers who seek FHA-backed mortgages.

Few specifics of the plan, designed to limit risks to the FHA's loan portfolio, are expected to be divulged immediately. But it seems clear from testimony that Housing and Urban Development Secretary Shaun Donovan will give later today that home buyers are going to have to dig deeper in their wallets to purchase a home.

"We have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan - to make sure that FHA borrowers have more 'skin in the game' and a stronger equity position in their loans," Donovan said in prepared testimony that will be given Wednesday afternoon to the House Committee on Financial Services. A copy of Donovan's testimony was released Wednesday.

Donovan said he plans to provide more detail on the changes next month.

Currently, borrowers are required to have a 3.5 percent cash down payment.

While the FHA plans to increase minimum credit scores "for the time being," it also is studying whether such an increase should be combined with other changes in underwriting requirements.

The agency also plans to seek permission from Congress to raise the annual mortgage insurance premiums.

One specific that Donovan is expected to offer is that sellers will be able to help buyers with only 3 percent, rather than the current 6 percent, of associated closing costs.

The moves affecting home buyers are part of a three-tier plan by the FHA to lessen risks to its portfolio. The agency also plans to take steps to increase FHA capital and to hold lenders more accountable for the quality of loans they write.

The changes come at a time when the FHA has become an important cog in the home-buying machine, insuring almost 30 percent of home purchases - more than 75 percent of which are to first-time home buyers - 20 percent of mortgage refinancings. Just three years ago, the FHA's share of the mortgage market was 3 percent.

(c) 2009, Chicago Tribune.

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