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Rules for government-backed loans grow stiffer

Thu., Dec. 3, 2009, midnight

FHA to require more cash upfront, better credit rating

WASHINGTON – Millions of homebuyers in the United States will have to come up with more cash and reach higher minimum credit scores to get a government-backed mortgage under changes announced by the Federal Housing Administration.

Some loans might require more than the current 3.5 percent minimum down payment, but the Obama administration is resisting calls for an across-the-board hike. Instead, it is looking at other ways to increase the amount of cash at closing, such as requiring borrowers to pay more of their mortgage insurance premiums upfront.

The FHA, which insures mortgages with low down payments, is scrambling to balance its increasingly important role in propping up the housing market with faltering finances of its own that could require a government bailout.

The agency’s share of home loans has surged from 3 percent in 2006 to nearly 30 percent this year as credit has tightened and borrowers’ bank accounts have been depleted. But that increased exposure has led to more defaults, driving the FHA’s reserves below their mandated levels.

“We’ve learned from recent history that the market is fragile, and we have to plan for the unexpected,” Housing and Urban Development Secretary Shaun Donovan, who oversees the agency, said at a House of Representatives hearing Wednesday.

Details of the changes announced Wednesday weren’t expected to be finalized until next month. Donovan said officials wanted to design them carefully to avoid damaging the budding housing recovery. But he said the Obama administration was considering increasing the minimum 3.5 percent down payment required for an FHA-backed mortgage in some instances, such as for people with lower credit scores, and it is seeking congressional authority to raise the premium for mortgage insurance.

Donovan told the House Financial Services Committee that the expanded role of the FHA is only temporary until the mortgage financing market recovers, and he doesn’t want to steer the agency away from its traditional role of helping lower-income people with solid jobs buy their first homes.

FHA-backed loans plunged during the housing boom earlier this decade as buyers flocked to easier-to-get and cheaper subprime mortgages. The FHA focuses on traditional 30-year fixed-rate mortgages and requires documents verifying income.

“Homeownership should be available to responsible borrowers … and we have to keep in mind FHA’s historical role of doing that,” Donovan said.

Donovan said bigger down payments lessen the risk of foreclosure, but other factors also lead to defaults, such as a borrower’s credit score.

Donovan wouldn’t commit to raising minimum down payments for all FHA loans, but he said they could be raised for people who don’t have high credit scores.

The FHA wants to increase the cash required from borrowers so they “have more ‘skin in the game’ and a stronger equity position in their loans,” Donovan said.

But the agency is looking at other ways to do that as well, such as increasing the upfront mortgage premium required and preventing the premium from being financed as part of the loan.

Donovan can change credit-score requirements without congressional approval, but he would need a vote by lawmakers to increase the mortgage insurance premium.

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