The Department of Housing and Urban Development (HUD) has made plans to temporarily tighten its rules on FHA cash-out refinancings due to falling house prices and rising defaults on refis. 

Starting April 1, the loan-to-value ratio on a Federal Housing Administration cash-out refinancing cannot exceed 85% of the appraised value of the one-to-four family property, according to a HUD letter to FHA lenders.

HUD had raised the cash-out limit to a 95% LTV ratio from 85% over three years so FHA could be competitive with the conventional refinancing products offered by subprime lenders.

"Given the continued deterioration in the housing market and FHA's need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinancings is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken," FHA commissioner Brian Montgomery says in the mortgagee letter.

FHA consultant Bud Carter said a tightening has been under consideration at HUD for several months. "It is not surprising given market conditions.

It really just goes back to what they had prior to October 2005," he said. Carter is with Potomac Partners in Washington.

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