In what may be yet another blow to the housing market – don’t fool yourselves, kids, the housing market isn’t currently rebounding, nor will it start its rebound any time soon – starting tomorrow, the Federal Housing Administration (FHA) will make it more expensive and harder to get a loan through them.
Don’t get me wrong, I don’t think these are bad moves, and will ultimately help keep troubled loans and foreclosed properties off of Uncle Sam’s books. In fact, regulations like this will help us avoid another housing bubble in the future.
That being said, tightening the regulations now, while a good idea, is likely to prolong the decline in housing prices and mute the recent increase in sales.
According to the FHA’s press release, the new regulations aim to:
1) Increase the up-front mortgage insurance premium (MIP) from 1.75% to 2.25%, as well as request approval to increase the maximum annual MIP that FHA can charge.
2) Force borrowers with low credit scores to bring a higher down payment. If you have a credit score of less than 580, you will be required to bring a down payment of at least 10%, which is up from 3.5%.
3) Reduce seller concessions at closing from six percent to three percent. This will help to protect the FHA from inflated home appraisals.
These rules will not only help the FHA to mitigate and hedge some of its risk, but it will also allow the agency to rebuild its reserve fund. With the FHA having issued nearly one out of every three mortgages in 2009, it certainly needs to mitigate its risk and rebuild its cushion.
While these changes may be a bitter pill to swallow right now, in the long run, I think they will help to restore some normalcy to the battered housing market.
What are your thoughts? Do you like these changes? Think they’re not worth the risk to the housing market recovery? Leave your thoughts below.