The Department of Housing and Urban Development (HUD) is moving to raise the bar for lenders that do business with the Federal Housing Administration (FHA) at a time when that agency's market share, and credit risk, are soaring.
HUD said Friday that it will propose a rule hiking the minimum net worth requirement for FHA lenders to $1 million. This would ensure lenders have the financial wherewithal to indemnify the FHA, which insures mortgages with low down payments, against losses on loans they made that were not properly vetted.
FHA's current net worth minimum of $250,000 has been in place since 1993; the proposed increase would bring the FHA in line with the standard of its sister agency, the Ginnie Mae. (FHA and Ginnie Mae are both part of HUD).
The department said it may also propose raising the net worth requirement "further in future years to a level comparable to those required by GSEs and other market institutions." (Fannie Mae, the government-sponsored enterprise, requires lenders to have at least $1.65 million in net worth.)
HUD said it would also propose, through the rulemaking process, to put lenders on the hook for faulty loans originated by mortgage brokers. As part of that change, brokers would no longer be required to get FHA's approval to originate loans headed to the agency. Hence more brokers could enter the FHA market — but it would be up to lenders to monitor them.
The proposed rules would be subject to a public comment period. Other steps HUD announced Friday will take effect on Jan. 1, including a requirement that lenders submit audited financial statements to FHA annually. The additional cost to lenders from this new requirement will be "limited," HUD said, because most of them already have to provide audited financials to the GSEs, regulators and investors.
Also beginning next year, FHA lenders will not be allowed to use appraisals that are more than four months old. Currently, appraisals can be up to six months old for existing properties and up to a year old for buildings that are proposed or under construction. Fresher appraisals should make for more accurate valuations in a volatile market.
According to National Mortgage News, today FHA accounts for 25% of all residential mortgages written — a stark contrast to three years ago when the agency had a mere 3% market share. After the subprime market imploded two years ago, FHA became the only game in town for borrowers with low down payments.
But as FHA's prominence has risen, so have its delinquencies and losses. HUD said Friday that a forthcoming annual audit forecasts that the FHA's capital reserve ratio will fall below the Congressional requirement of 2%.