Federal Housing Administration (FHA), which insures lenders against losses on home mortgages, announced a series of changes that will have far-reaching impact on the housing market of San Jose, the entire San Francisco Bay Area and rest of the country.

Background –

The agency confirmed that, as of Sept. 30, it would fall short of a legal requirement that it maintain supplementary reserves of 2% of the loans it insures. Those reserves supplement a fund that provides for projected claims over the next 30 years. The extra capital cushion last year was about 3%, down from 6.4% in 2007. Falling reserves are because of higher claims that the FHA has been subjected to in last couple of years. The higher claims has come because of more defaults/delinquency on FHA Insured mortgages.The FHA earlier reported that in July 7.8% of the single-family mortgages it insured were 90 days or more overdue or in the foreclosure process, up from 6.6% a year earlier. For the second quarter, about 8% of all home mortgages were 90 days or more past due or in foreclosure, according to a survey by the Mortgage Bankers Association.

To ensure that FHA rebuilds the cushion of 2% or higher, Commissioner David H. Stevens on Friday announced plans to implement a set of credit policy changes that will enhance the agency’s risk management functions. Stevens also announced his intention to hire a Chief Risk Officer for the first time in the FHA’s 75-year history.

Commissioner Stevens said “To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action. That said, given the size and scope of the FHA and its importance to today’s market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections.”

Good News for First Time Buyers – Mr. Stevens said tighter credit standards would suffice to rebuild the cushion to 2% or more, and that the FHA wouldn’t need to raise the premiums borrowers pay or seek an increase in its minimum down-payment requirement of 3.5%.

Good news for Mortgage Brokers – Banks will be liable for the loans they underwrite, not brokers. This will allow less barriers to entry for the brokerage community.

Some other highlights:

Increase in Net-Worth requirements for Lenders – The FHA plans to propose to increase the net worth requirement for approved lenders. The requirement is currently at $250,000. HUD is proposing an initial increase of approximately $1,000,000. To maintain consistency with industry standards, HUD may propose that the net worth requirements be increased further in future years. These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund.

Revised Streamline Refinancing Transaction – For refinancings of FHA loans, the agency plans new rules for verifying income and other quality-control checks. It also will impose a maximum loan value of 125% of the current estimated home value on refinanced loans, in line with government-backed mortgage investors Fannie Mae and Freddie Mac.

Changes to Appraisal – Appraisals will be valid for no more than four months, down from six previously. The FHA also plans to change rules aimed at averting pressure on appraisers, making them more consistent with those adopted earlier this year by Fannie and Freddie. Mortgage brokers or bank employees paid on commission won’t be allowed to order appraisals. They are not calling it HVCC, but technically that’s what it is! To read more details on this click here