The Federal Housing Administration (FHA) has proposed tighter underwriting requirements for its single-family mortgage loan program.

Released on July 15, the proposed changes include reducing the current 6% limit on seller concessions to 3%, tightening underwriting standards on loans that are underwritten manually and requiring minimum credit scores. 

These initiatives were originally announced on Jan. 20 as part of FHA measures to reduce risk and bolster capital reserves.

Since the downturn in the housing market, the FHA has become the primary source of mortgage credit for underserved borrowers — primarily first-time home buyers, minorities and those with limited downpayment capabilities — as other sources of mortgage credit have disappeared.

The FHA’s share of the market has grown from 3% during the housing boom to almost 30% today. This rapid growth has come at a cost, with a 2009 actuarial study of the agency’s insurance fund estimating that its capital reserve ratio fell to 0.53%, significantly below the 2.0% statutory reserve requirement.

Other steps the FHA is taking to augment its capital reserves include raising mortgage insurance premiums (MIPs) and strengthening lender requirements and enforcement. In January, the FHA increased the upfront MIP to 2.25% and legislation under consideration in Congress would increase the annual MIP, allowing the agency to lay off the increase in the upfront MIP. This bill (H.R. 5072) passed the House in April and is awaiting action in the Senate.

In a letter to Secretary of Housing and Urban Development Shaun Donovan in January, NAHB raised concerns about FHA’s underwriting changes. The association has also met with FHA Commissioner David Stevens to discuss the implications of the tightening and has surveyed its members on the potential impact of reducing seller concessions.

The FHA has said that the proposed reduction in seller concessions will bring its limits more in line with industry standards and reduce risk. NAHB is concerned that this move would not be in the best interest of home buyers, particularly first-time buyers, who would see an increase in the amount of upfront funds they need to purchase a home. 

Now is the wrong time to be reducing seller concessions, NAHB has said, and FHA should be able to sufficiently manage risk and remain financially sound by properly evaluating the creditworthiness of borrowers and following its current underwriting guidelines.

At a time when a housing upturn is needed to sustain economic recovery, reducing seller concessions will only add additional barriers to homeownership, according to NAHB. Current seller concession guidelines provide a viable way to reduce home buyer costs and should be used as an incentive to help reduce current housing inventories.    

NAHB will be raising these and other concerns in its comments on the proposed policy changes, and is seeking input from association members on all aspects of the notice.

There is a short 30-day comment period and comments are due on Aug. 16, 2010.

Members should e-mail their thoughts and comments to Steve Linville at slinville@nahb.org by Aug. 3 to have them included in NAHB’s comment letter to HUD.