The FHA is set to increase its lending standards and financing powers in 2013 to aid its ailing budget, though Congressional opposition may stall its efforts.

By Peter Ricci

In an effort to shore up its struggling finances, the Federal Housing Administration (FHA) has announced that it will be tightening its mortgage standards and policies for certain homebuyers in 2013.

The FHA’s finances have been called into question repeatedly by lawmakers and analysts alike, and though the FHA has increased its insurance premiums and minimum credit scores to increase its revenue, this seems to be its most aggressive attempt yet to purge its projected $16.3 billion deficit.

New FHA Policies Aim at Improving Agency’s Finances

As the Wall Street Journal reported, the FHA’s Acting Commissioner, Carol Galante, explained the agency’s new policies in a letter this week to Senator Bob Corker, a Republican from Tennessee. They include:

• The suspension of the agency’s most popular reverse-mortgage option, which allows Americans aged 62 or older to take out cash on their homes in large, upfront payments; instead, seniors will have access to a “Home Equity Conversions Mortgage Saver,” which will still allow them to take out cash, albeit less.
• Indeed, the FHA’s project deficit is from the seniors reverse-mortgage option alone is $2.8 billion, though the Journal does point out that in 2009, Congress attempted to address the nation’s plunging home values by increasing the maximum value that seniors could borrow against, thus increasing the demand for reverse-mortgages.
• In addition, Galante wrote the FHA is aiming to increase its underwriting standards for borrowers with credit scores between 580 and 620, along with requiring minimum down payments of 5 percent (rather than the agency’s customary 3.5 percent) for mortgages exceeding $625,500.

Legislative Squabbling Over FHA Powers

Of course, given that this is Capitol Hill, no changes to the FHA’s powers and policies will come easy. As the Journal also reported, pending legislation that would increase the FHA’s power when dealing with defaulting loans has run into some crippling opposition in the Senate, despite passing through the House with only seven “No” votes.

The legislation would grant the FHA two new powers – first, it would be able to force lenders to cover the costs of defaulting loans, if the lender was found to have violated federal lending standards; and second, it would be able to bar lenders from the FHA program, should they have a history of making bad loans.

Though Tim Johnson, the Democratic Senator from South Dakota who chairs the Senate Banking Committee, is pushing the legislation, Senate Republicans are balking at the new powers, arguing instead that the FHA should focus on lowering the maximum loans it will guarantee, raising minimum credit scores and discontinuing its policy of granting mortgages to foreclosed homeowners three after the foreclosure.

Brace yourselves for a fun 2013!