Everyone has been awaiting (but not eagerly in some cases) for the newly revised FHA Lending Rules. Below is a summary of these new rules, from The Glaser Group.

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THE GLASER GROUP

FHA tomorrow will announce a series of changes designed to protect the federal agency that has emerged as the cornerstone of the mortgage market as the housing sector wobbles toward recovery.

On the whole, mortgage lenders will find the new rules painful but necessary. The problem is a perception that for the past 4 years, FHA was an "anything goes" environment. So they have a lot of catching up to do in terms of tightening up the rules.

What makes this hard: With FHA hovering around 40% of new loan originations, even small rule changes echo through the housing market with a big impact.

Our view of the new course charted by FHA is that:

FHA is instituting prudent financial rules, without pulling back so far as to contribute to a further slowing of the housing market.

Mortgages will be harder to come by for some higher risk borrowers. But FHA has been careful to keep the door open for non-traditional borrowers -- especially minorities, 50% of whom now rely on FHA for mortgage credit.

Borrowers will bear more of the costs of the government insurance program through higher premium charges. But while the additional revenue will help ensure that FHA stays solvent, the burden to the individual borrower is modest and will not be a disincentive to purchase a home.

Some riskier borrowers will have to come up with higher downpayments -- a necessary move in those markets where a decline in home value can wipe out a new buyer's equity almost before the ink is dry on the sales contract.
So, FHA has a tough balancing act, but we think they have hit the "sweet spot" by successfully juggling three objectives simultaneously: --Reduce the financial exposure of the FHA fund through tighter credit rules (especially with regard to bringing FHA capital reserves over 2%);
--Keep open the flow of mortgage credit sufficient to make sure the housing market doesn't go into a renewed dive,
--And avoid balancing the FHA books on the backs of credit worthy minority borrowers.

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Highlights of the FHA Changes

-- Less than 580 FICO needs 10% down. Requires rulemaking. FHA is NOT otherwise raising the current 3.5% minimum downpayment -- the vast majority of borrowers will not be impacted, particularly since most lenders have already put higher credit score floors in place.

--Raise upfront Mortgage Insurance Premium to 2.25 (up from 1.75)
--Has significant positive capital impact for FHA. Implemented via mortgagee letter.

--Continue to allow finance of upfront MIP.

--Pursue legislative authority to allow flexibility to bring annual premium higher. (Currently capped at .55). Over time may increase annual and decrease up-front. FHA believes this is better for borrower. Upfront depletes equity.

--Reducing seller concessions from 6% to 3% across the board. Via proposed rule.

--Enforcement:
a) credit watch terminations at lender underwriting id in addition to originator id. (i.e. company level) 300% compare would trigger termination.
b) public reporting of lender performance through scorecard system.
c) indemnification. Law allows indemnification against Lender Insurance lenders, HUD will implement through notice and comment.
d) Expands indemnification beyond fraud and misrepresentation. (will go out for comment).
e) Will seek legislative authority to enforce against DE lenders.
f) Will seek legislative authority to establish ability to sanction lenders nationwide based on performance of local branch.