New Rules Seek to Ease Mortgage Lending

Written by
David Mully
Read Time: 3 minutes

Steps to ease access to mortgage credit, including cutting the cost of FHA loans, were announced Tuesday by the two federal agencies that oversee the vast majority of U.S. residential mortgages.

A four-year pilot program that will allow borrowers who undergo housing counseling to reduce the steep fees paid for FHA mortgage insurance was unveiled by the Department of Housing and Urban Development (HUD). In addition, Federal Housing Finance Agency (FHFA) Director Mel Watt disclosed that his agency is taking several steps to boost liquidity of mortgages backed by Fannie Mae and Freddie Mac.

Would trim FHA insurance fees

The FHA program, part of a broader "Blueprint for Access" initiative, will reduce the cost of an average $180,000 mortgage by up to $9,800 over the life of the loan, or an average of $325 year. Borrowers who complete approved housing counseling before buying their home will be eligible for a 0.50 percentage point reduction in the FHA's 1.75 percent upfront mortgage insurance premium, plus a 0.10 percentage point reduction in the annual insurance premium, which runs as high as 1.35 percent of the loan.

Borrowers who participate in post-closing counseling and maintain a two-year record of on-time payments will receive an additional 0.15 percent reduction in their annual mortgage premiums.

The moves would help counter some of the recent increases in the FHA insurance premiums, which in recent years have topped out as low as 1.0 percent for the upfront premium and 0.55 percent for the annual.

Called HAWK, for Homeowners Armed With Knowledge, the first phase of the pilot program is scheduled to be implemented this fall. In addition, the FHA is also undertaking steps to clarify its mortgage guidelines for lenders so that they can make loans with greater confidence of not running afoul of FHA rules.

Rules easing on Fannie, Freddie mortgages

The FHFA is also taking steps to boost lender confidence, by easing the requirements for situations where they'd have to reacquire troubled mortgages back from Fannie Mae and Freddie Mac. The new guidelines will allow a borrower to miss two payments in the first 36 months without lenders being required to repurchase the mortgage for not meeting loan quality standards.

Concerns over potential repurchases of loans sold to Fannie and Freddie have been regarded as a significant factor in creating tight credit conditions.

Watt also said the FHFA will not be lowering the upper limits on mortgages eligible to be guaranteed by Fannie Mae and Freddie Mac, as proposed by his predecessor last year. Instead, the limit will stay at $417,000 in most of the country, and up to $625,500 in certain high-value areas.

Watt also indicated the FHFA will be taking steps to boost residential mortgage lending by Fannie Mae and Freddie Mac, rather working to limit their scope and gradually wind them down, as many in Congress have demanded. Although the two guarantors are required to gradually shrink their lending portfolios in the coming years, Watt said the plan is to pass more of the risk off to private capital, which he said will boost liquidity while reducing taxpayer exposure to potential losses.

He said the loan securitization platform the FHFA is developing for Fannie Mae and Freddie Mac is designed to be transferrable to a successor entity to those organizations. The Senate Banking Committee is presently considering legislation, the Johnson-Crapo bill, that would create such a successor.

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