Tighter underwriting guidelines unveiled Wednesday by the Federal Housing Administration (FHA) will make it harder for lenders to qualify borrowers in a year when origination volumes are already expected to tank.

FHA Commissioner David Stevens announced four major policy changes that he said would primarily affect borrowers "at the margins": raise mortgage insurance premiums; require higher down payments from borrowers with low credit scores; reduce home-seller concessions; and step up enforcement actions against FHA lenders. These were consistent with the outline that Housing and Urban Development Secretary Shaun Donovan gave last month.

Raising the up-front premium by 50 basis points, to 2.25%, may have the most immediate impact, several lenders and mortgage experts said.

"It will be harder to make loans, because fewer borrowers will qualify," said Matthew Pineda, the president of Castle & Cooke Mortgage in Salt Lake City. "These are the right steps for FHA, but it means borrowers are financing a government fee to pay for all the other borrowers who are in default."

Stevens said increasing the up-front premium was "not our first choice," because it would add to the loan balance on the front end. The FHA wants Congress to raise the cap on the total premiums it can charge. If that happened, he said, the FHA would shift some of the increase to the annual premium, which would allow the cost to be financed over the life of the loan "and overall the terms will be more beneficial to the borrower."

Richard Andreano, a partner at the law firm Patton Boggs, said the FHA's halving the maximum share of a homebuyer's closing costs that sellers can pay, to 3%, may have a bigger impact by disqualifying many first-time buyers.

"Many new-home sales are made possible through seller contributions, so it may have an adverse impact on the housing industry and should be analyzed," Andreano said.

Another FHA policy change will require, beginning early summer, that borrowers with FICO scores of 580 or less make a down payment of at least 10%. Stevens said that while most large lenders already had minimum FICO scores of 620 or higher "that is not the case across the board." He cited Taylor, Bean & Whitaker Mortgage Corp., which went bankrupt last year, as an example of a lender that was "clearly going below the minimum FICO score requirement" of the larger lenders.

Brian Koss, the managing partner at Mortgage Network Inc., a privately held lender in Danvers, Mass., said some lenders are trying to go around the big companies' requirements by bypassing them and selling their loans directly to the Ginnie Mae.

"The major lenders have already put a credit floor in, but there are still some going down to 520, and even a FICO score of 580 is still pretty ugly," Koss said.

Steve O'Connor, a lobbyist for the Mortgage Bankers Association, said he thinks roughly 10% of the FHA's current business comes from borrowers with credit scores of roughly 580 or less. "These were prudent changes, they are tough changes and they are not going to be easy."

Beginning today the FHA will begin monitoring the performance of loans vetted by individual underwriters, not just the lenders they work for. HUD also is asking Congress to give it more authority to kick lenders out of the FHA program and make the remaining ones eat credit losses.

Pineda said such steps would cause lenders, in turn, to start penalizing their salespeople for making loans that sour. "There is a cost associated with tying a loan back to the originator, and that cost may come a year from now, and that's hard to get into a loan officer's mind-set," he said. "These changes will make loan officers recognize that there are consequences and they have to pay for them."

Lisa Schreiber, the chief strategy officer at NetMore America, a lender in Walla Walla, Wash., said the FHA is trying to close the gap between its guidelines and the stricter standards of Fannie Mae and Freddie Mac.

"Everything on the conventional side has been tightening, so you have a wide disparity between FHA and conventional mortgages, it's like a canyon now," Schreiber said. The changes "will certainly affect some borrowers," she said, "but I don't think we'll see a 40% drop in volume from borrowers who don't qualify."

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